{"id":25154,"date":"2019-09-30T19:00:50","date_gmt":"2019-09-30T13:30:50","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=25154"},"modified":"2020-08-25T13:56:23","modified_gmt":"2020-08-25T08:26:23","slug":"gratuity-definition-eligibility-calculation-and-exemption-a-complete-overview","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/gratuity-definition-eligibility-calculation-and-exemption-a-complete-overview\/","title":{"rendered":"Gratuity: Definition, Eligibility, Calculation, and Exemption \u2013 A Complete Overview"},"content":{"rendered":"<p class=\"has-drop-cap\">Payment of Gratuity is governed by the\nprovisions of the <strong><em>&ldquo;Payment of Gratuity Act, 1972&rdquo;<\/em><\/strong>. Gratuity is a monetary benefit\ngiven to the employee apart from the regular monthly salary paid by the employer.\n<\/p>\n\n\n\n<div class=\"shadow4\"><i>NOTE: Gratuity is a lump-sum amount that is paid in the form of financial reward to an employee as gratitude for rendering his\/her services to the company for a continuous period. The gratuity is paid to the employee at the time of retirement.<\/i><\/div>\n\n\n\n<p><strong>Employers for whom\nGratuity is mandatory to be paid to the Employees<\/strong><\/p>\n\n\n\n<p>As per the Gratuity Act, 1972,\nfollowing employers having more than ten employees at any day during the\npreceding financial year are required to pay gratuity on a mandatory <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Basis&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;In finance, the &amp;quot;basis&amp;quot; is a term with several applications, including representing the difference between the spot price and the future contract price of an asset, which is vital in investment(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/basis\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>basis<\/a>:<\/p>\n\n\n\n<ul><li>Mines<\/li><li>Oil fields<\/li><li>Factories<\/li><li>Shops &amp; establishment <\/li><\/ul>\n\n\n\n<p>Calculation of gratuity and tax paid thereon varies as per the different rules for government employees, employees covered under the <strong>Gratuity Act<\/strong><sup><a href=\"https:\/\/en.wikipedia.org\/wiki\/The_Payment_of_Gratuity_Act,_1972\">[1]<\/a><\/sup> and employees who are not covered under this Act. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>What are the Eligibility Criteria for Gratuity Payment?<\/strong><\/h3>\n\n\n\n<p>Gratuity Eligibility shall be payable to an employee after the termination of his employment.<\/p>\n\n\n\n<ul><li>On his superannuation <\/li><li>On his retirement or resignation<\/li><li>On his death or disablement due to accident or disease.<\/li><\/ul>\n\n\n\n<div class=\"shadow4\"><i>It is, however, required that the employee must have completed 5 years of his service in employment. However, this condition of 5 years is not mandatory in the case of death or disablement of an employee.<\/i><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Calculation of Gratuity<\/strong><\/h2>\n\n\n\n<p>The employer deposits the eligibility of <a href=\"https:\/\/enterslice.com\/learning\/gratuity\/\"><strong>Gratuity fund <\/strong><\/a>with an insurer who in return invests the same into some ventures to get a fixed return. Usually, the amount is invested in fixed income or debt funds to avoid the risk of <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Market&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;A market is a structured environment, either physical or virtual, where buyers and sellers convene to trade goods and services. This trading hub operates based on the principles of supply and(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/market\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>market<\/a> volatility.<\/p>\n\n\n\n<p>eligibility is calculated based on factors such as the total number of completed years of service and the last salary drawn. <\/p>\n\n\n\n<p>Salary as per the Gratuity Act means <strong><em>Basic\nSalary plus dearness allowances. <\/em><\/strong>Gratuity is paid by the employer to\nits employees who have completed at least 5 years of service. Also, part of the\nyear is treated as 1 complete year, for instance, if an employee completes 7\nyears and 7 months of service, it is rounded off to 8 complete years.<\/p>\n\n\n\n<p>For calculation of Gratuity eligibility, a month is assumed to be of 26 complete days. So, for calculating the 15 days salary, we have to multiply the year of service with 15\/26 multiplied by the last salary is drawn.<\/p>\n\n\n\n<p>In case of the death of an employee,\nthe requirement of 5 years of service is not applicable, and the amount accrued\nis to be paid to the legal heirs or nominee of employees. Gratuity shall be\npaid within 30 days of the last working day.<\/p>\n\n\n\n<p class=\"has-text-color has-background has-very-light-gray-color has-vivid-cyan-blue-background-color\"><strong>For Example:<\/strong><\/p>\n\n\n\n<p>Last salary drawn: INR 50000<\/p>\n\n\n\n<p>Employment Tenure: 11 years 7 months<\/p>\n\n\n\n<p>Gratuity payable: 50000*12*15\/26 = INR 3, 46,154 \/-<\/p>\n\n\n\n<p><strong>The\nformula for the calculation of Gratuity:<\/strong><\/p>\n\n\n\n<p><em>The last salary is drawn (Basic + Dearness Allowance)*Number of years of completed service* 15\/26<\/em><\/p>\n\n\n\n<div class=\"read\"><p><b>Recommended Article:<\/b> <mark><a href=\"https:\/\/enterslice.com\/learning\/read-the-amazing-history-of-income-tax-of-india\/\" target=\"_blank\" rel=\"noopener noreferrer\">The Amazing History of Income Tax in India- Read Now<\/a><\/mark>.<\/p><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Exemption of Gratuity from Taxation<\/strong><\/h2>\n\n\n\n<p>Taxation on gratuity is exempted up to a certain limit as specified under <strong>Section 10(10) of the<\/strong> <strong>Income Tax Act, 1961<\/strong>. <\/p>\n\n\n\n<ul><li><strong>Employees covered under the Gratuity Act, 1972:<\/strong><\/li><\/ul>\n\n\n\n<p>Every employer of factories, mines, oil\nfields, etc. who has at least 10 employees on any day during the preceding year\nis covered under the Gratuity Act. Though once covered under the act,\nprovisions of the act remain applicable even if the number of employees falls\nbelow 10.&nbsp; <\/p>\n\n\n\n<p><strong>Least of the following is exempted from the tax:<\/strong><\/p>\n\n\n\n<p><strong>Gratuity calculated as per Gratuity Act, 1972. The formula for calculating the gratuity is:<\/strong><\/p>\n\n\n\n<p>The last salary is drawn (Basic + Dearness Allowance)* Number of years of completed service* 15\/26<\/p>\n\n\n\n<p class=\"has-text-align-left\">Or<\/p>\n\n\n\n<p>INR 20 Lakhs (as amended)<\/p>\n\n\n\n<p>Or<\/p>\n\n\n\n<p>Gratuity received<\/p>\n\n\n\n<p class=\"has-text-color has-background has-very-light-gray-color has-vivid-cyan-blue-background-color\"><strong>For Example: <\/strong><\/p>\n\n\n\n<p>The salary is drawn: INR 1,00,000<\/p>\n\n\n\n<p>Gratuity received: 11,00,000<\/p>\n\n\n\n<p>Period of Employment: 19 years 6\nmonths.<\/p>\n\n\n\n<p>Gratuity as per act:&nbsp; 100000*20*15\/26 = 11,53,846<\/p>\n\n\n\n<p>Maximum Exemption allowed: 20,00,000<\/p>\n\n\n\n<p>Gratuity actually received: 1,00,000<\/p>\n\n\n\n<p><strong>Exempted\nGratuity: 11,00,000 ( Least of the three)<\/strong><\/p>\n\n\n\n<p>Taxable Gratuity:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp; NIL<\/p>\n\n\n\n<ul><li><strong>Employees not covered under the Gratuity Act, 1972<\/strong><\/li><\/ul>\n\n\n\n<p>Certain employers who are not covered\nunder the Gratuity Act make the payment of gratuity to its employees\nvoluntarily. Gratuity payable to the employee is calculated based on a\nhalf-month salary for every completed year.<\/p>\n\n\n\n<p><strong>Least of the following is exempted from the tax:<\/strong><\/p>\n\n\n\n<p>Last 10 months salary drawn (Basic + Dearness Allowance)* Number of years of completed service* 1\/2<\/p>\n\n\n\n<p class=\"has-text-align-left\"><strong><em> <\/em><\/strong><em>o<\/em>r<\/p>\n\n\n\n<p>INR 10 Lakhs (amended limit of exemption is for employees covered under Gratuity Act)<\/p>\n\n\n\n<p>or<\/p>\n\n\n\n<p>Gratuity received<\/p>\n\n\n\n<p class=\"has-text-color has-background has-very-light-gray-color has-vivid-cyan-blue-background-color\"><strong>For\nExample:<\/strong><\/p>\n\n\n\n<p>The salary is drawn: INR 1,00,000<\/p>\n\n\n\n<p>Gratuity received: 11,00,000<\/p>\n\n\n\n<p>Period of Employment: 19 years 6\nmonths.<\/p>\n\n\n\n<p>Gratuity as per act:&nbsp; 100000*20*1\/2&nbsp; &nbsp;&nbsp;&nbsp;&nbsp; 10,00,000&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <\/p>\n\n\n\n<p>Maximum Exemption allowed: &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;10,00,000<\/p>\n\n\n\n<p>Gratuity actually received: &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11,00,000<\/p>\n\n\n\n<p><strong>Exempted\nGratuity: 10,00,000 ( Least of the three)<\/strong><\/p>\n\n\n\n<p>Taxable Gratuity: 1,00,000<\/p>\n\n\n\n<ul><li><strong>Government employees<\/strong><\/li><\/ul>\n\n\n\n<p>This paid by the Government employers to its employees is <strong><em>fully exempted from taxation.<\/em><\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Amendment&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;An &amp;quot;amendment&amp;quot; refers to the formal change or correction of a legal document, often involving additions, variations, or deletions to address irregularities or clarify points in an agreement.(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/amendment\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>Amendment<\/a> and its Impact<\/strong><\/h3>\n\n\n\n<p>Ministry of Finance has enhanced the\nlimit of maximum exemption from INR 10 Lakhs to INR 20 Lakhs for gratuity\ntaxation as per section 10(10)(iii) of Income Tax Act,1961. The ceiling of\ngratuity has been amended from time to time by the Indian Government as per the\noverall economic situation and employer&rsquo;s capacity to pay.&nbsp; This decision of increase in the tax-free\namount of gratuity has left the employees happy as they get to save a lot on\nthe amount of tax that was earlier supposed to be paid by them. <\/p>\n\n\n\n<div class=\"read\"><p><b>Also, Read:<\/b> <mark><a href=\"https:\/\/enterslice.com\/learning\/gratuity\/\" target=\"_blank\" rel=\"noopener noreferrer\">Avail the Gratuity Money it&rsquo;s your Legal Right!<\/a><\/mark>.<\/p><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Payment of Gratuity is governed by the provisions of the &ldquo;Payment of Gratuity Act, 1972&rdquo;. Gratuity is a monetary benefit given to the employee apart from the regular monthly salary paid by the employer. NOTE: Gratuity is a lump-sum amount that is paid in the form of financial reward to an employee as gratitude for [&hellip;]<\/p>\n","protected":false},"author":24,"featured_media":25174,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1314,2434],"tags":[2773],"acf":{"service_id":"220"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v14.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What is Gratuity? 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