Gratuity Rules in India
What is Gratuity
A Gratuity is a lump sum payment given by
the employer. It is a mark of
recognition to the employee’s service. An employee gets
gratuity at the time of retirement or
leaving the job. It is a ‘defined benefit’ plan.
You can know your
gratuity amount in advance.
The amount of gratuity depends only upon the tenure of service and last drawn
salary.
Gratuity Rules
Every
employer is bound to give gratuity amount to its employees if it employs
more than 10 people. The gratuity is given after leaving the job of you have
completed continuous service of 5 years. Gratuity is a non taxable amount
provided employer gives gratuity according to the
formula.
Lest us understand the gratuity rules in detail.
5 Years Continuous Service
To be eligible for
gratuity, you must complete 5 years continuous service. 6 months of a year
can be counted as one year. If you have completed 4 years and 7 months in
service, you will get the gratuity.
Continuous service
means uninterrupted service. But, it does include the interruption due to,
leave, sickness or accident. The strike, lay-off, or a lockout is also not
considered as interruption. Indeed, any interruption which is not due to the
fault of the employee, would not be counted.
Only After Leaving Job
An employee is
entitled to get gratuity only after the termination of employment. This
termination may be of retirement, resignation or job switch.
Death or Disablement Relaxation
The minimum 5-year
service rule is not applicable in case of death or disablement. The gratuity
amount would be given to the nominee or legal heirs.
Gratuity is Non-Taxable
Gratuity amount is
totally tax-free. However, it should be given according to the prescribed gratuity
formula.
Employer Can give Excess Gratuity
An employer can
give gratuity more than the prescribed formula. But the excess gratuity would
be subject to tax.
Gratuity Rules Applicable If Employees Are More Than 10
Every factory or
establishment would pay gratuity to its employees. The gratuity rules are not
mandatory for the factory or establishment which employs less than 10
persons. The number of employees would be counted as the average of last
12 months.
Protected Against Liabilities
No court can attach
gratuity amount. Whether there is a decree against the employee from a civil or
criminal court.
Forfeiture Of Gratuity If There is Damage
Employer can
forfeit gratuity if an employee makes a loss to the company. The
forfeiture would be to compensate the loss. However, the employer must
terminate the services of the employee because of this damage.
Gratuity Formula
There is a gratuity
formula for the payment. According to this formula, 15 days salary is given for
every completed year. Since the number of days in the month is considered only
26, you will get 15/26 of your one-month salary for every completed year.
This formula is
dependent upon these two variables.
Salary
The salary includes
basic pay, dearness allowances and commission. The last drawn salary is
considered for gratuity calculation.
If, the employee is a daily wage earner, the average of last 3-month wage
is considered as one-day salary.
Service Tenure
The continuous
duration of service. More than 6-month service in a year is calculated as one
year.
The Gratuity Formula
Gratuity Amount = Salary x Tenure x 15/26
Gratuity Percentage
For every year, you
will get 57.69% of monthly salary
as gratuity. Note, the monthly salary would be last drawn salary and it
includes only Basic +DA+ commission.
Download Automated Gratuity Calculator in Excel as per the Gratuity Act
Gratuity Exemption
There is a limit of
gratuity exemption from tax. Gratuity of more than 10 lakhs would be liable to
the tax. The employee must pay the tax on the gratuity over and above the Rs
10,00,000. Earlier this limit was only 3.5 lakhs.
You can also read
the whole gratuity
act for better understanding of gratuity rules and minute details.
