Gratuity Calculation: If an employee completes a period of five years in an organization, then he is considered entitled to gratuity. What is the basis of its calculation and you are exempted from income tax. All these are being discussed here.
Gratuity Calculation : Salaried employees, except temporary or contract employees, are entitled for payment of gratuity after completion of a certain period of employment in the same organization.
As per the Gratuity Act 1972, an employee becomes eligible to receive gratuity amount after completing five consecutive years of service in an organization.
The amount of gratuity is paid after the employees retire, resign or are fired
As per Section 4 of the Gratuity Act, the condition of continuous service of five years is not applicable in case of termination of service by reason of death or disability.
In case of death of an employee, gratuity amount is paid to the nominee or legal heir.
As per Section 4 of the Gratuity Act, the condition of continuous service of five years is not applicable in case of termination of service by reason of death or disability.
In case of death of an employee, gratuity amount is paid to the nominee or legal heir.
The Gratuity Act 1972 applies to all organisations, including factories, mines, oil fields, plantations, ports, railways, motor transport undertakings, companies, shops and establishments employing more than 10 workers.
Time limit
- As per the existing rules, the employee can apply within 30 days of the gratuity amount becoming due.
- Also the employer cannot reject the application even if it is filed after 30 days.
- The employer has to specify the amount payable and the date of payment within 15 days from the date of receipt of application for gratuity amount.
- In case of rejection of the application, the employer has to give the reason for the rejection of the application for gratuity.
Calculation of Gratuity
- The amount of gratuity earned by the employee depends on the tenure of service and the last drawn salary. It is calculated on the basis of basic pay and dearness allowance.
- For the calculation of gratuity, every month is considered as 26 days for the organizations coming under the Gratuity Act 1972.
- Gratuity is paid every 15 days for each completed year of service. In the last year of employment, if an employee works for more than six months, he will be rounded off to the next number.
- For example, if an employee works for a total period of eight years or seven months, then it is considered as 9 years for gratuity calculation.
Formula for Calculation of Gratuity
- Last drawn pay (Basic pay plus dearness allowance) * Number of completed years of service * 15/26
- Employees of organizations not covered under the Gratuity Act are also eligible for payment of gratuity. In such cases, the total number of days in a month will be 30.
Tax exemption
- All gratuity payments received by government employees are entitled to full exemption from income tax.
- In case of private sector employees, income tax rules on gratuity are applicable on the basis of whether the employee is covered under the Gratuity Act, 1972 or not.
- For private sector employees covered under the Gratuity Act, the income tax exemption applicable on gratuity received is the least of the following:
- Maximum amount specified by the government, which is currently limited to 20 lakhs
- Last drawn pay *15/26*Years of service
Actual gratuity received
- For private sector employees not covered under the Payment of Gratuity Act, the income tax exemption limit is the minimum of the following:
- Average salary of last 10 months (Basic + DA) x Number of years of employment x 1/2
- 10 lakh rupees
- Gratuity actually received
