All you need to know about Gratuity Calculation and Eligibility

As India’s leading HR & Payroll software, we get various queries regarding the different components of the CTC with queries related to Gratuity being the most frequently asked question by both employers and employees. In this post, we aim to answer the most frequently asked questions pertaining to eligibility criteria for gratuity, taxability of gratuity and all about gratuity calculation.

1.  What is Gratuity?

Gratuity is a sum of money paid to an employee by the employer for the services rendered to the company. However, gratuity is paid to only employees who have completed 5 years or more in the company. Gratuity is an important form of social security provided by the employer in monetary terms for the services rendered to the organization.

2. Is the payment of Gratuity applicable to all establishments?

As per the Payment of the Gratuity Act of 1972, Gratuity is applicable to all establishments including NGOs, educational institutions and hospitals with an employee size of 10 or more.

Once the Payment of Gratuity Act 1972 becomes applicable to an establishment, the Act would continue to remain applicable despite the fact that the team size has reduced to number less than 10.

3. Why is Gratuity part of the CTC?

It is the company’s choice to make gratuity part of the employee’s CTC structure. Usually, most companies do make gratuity as part of the CTC structure.

CTC means Cost to Company and signifies the total cost incurred by the company for employing a person. Since Gratuity is a fixed contribution from the company’s side, it is shown as the part of the CTC components.

4. Who is eligible for receiving gratuity?

There are a few instances that mark the eligibility for gratuity for an employee.

–  An employee retires after completing 5 years of working with the same organization.
– An employee resigns after 5 years of working with the same organization.
– An employee passes away or suffers disability due to illness or an accident

5. How do I apply for gratuity?

Usually when an employee resigns from his service and if he is eligible for gratuity, then by default employer must make his gratuity payment along with his Full and Final Settlement.

6. How is gratuity calculated?

Gratuity is dependent upon the total number of years served in the company and the last drawn salary.

If A is (number of years of service in a company) + B is (last drawn salary) {Basic Salary+ Dearness Allowance}

Then, Gratuity = A*B*15/26 ; 15 being wages for 15 days and 26 being the days of the month.

For example – Ankit has worked for QC Associates for 10 years and his last drawn salary (Basic + Dearness Allowance) is Rs 30,000.

Hence Ankit’s gratuity amount would be – 10*30,000*15/26 = Rs 1,73,076

7. Can an employee claim Gratuity before his/her completion of 5 years?

An employee can claim gratuity before completion of 5 years only in two instances i.e occurrence of death or occurrence of disability due to illness or accidents. In the instance of Death the claim would be transferred to the assigned nominee.

However, according to a ruling of Madras High Court, an employee is eligible for gratuity in case he completes 240 days of service in the fifth year of service.

8. Is Gratuity taxable?

Taxability of gratuity is dependent on which sector does the employee belong to. Gratuity amount is not taxable in case of government employees. Non-government employees can also get a Tax exemption on their gratuity amount. Although, there is an upper limit of Rs 20 lakhs for the tax concessions.

9. Can an employer forfeit gratuity amount of the employee?

Employer can forfeit gratuity even if the employee has completed the required 5 years of service in the following cases

–  If the services of such employee have been terminated for his disorderly conduct or any other act of violence
– If the service of an employee have been terminated for any act which constitutes an offense involving immorality, provided that such offense is committed by him in the course of his employment.

It must be noted that above act should have been committed by the employee during his employment. A proper enquiry must be held after which employee was proved guilty for misconduct and a termination note must be issued to employee describing about his/her misconduct.

10. Is there a cap to the amount I receive as gratuity?

Yes, the employer cannot pay you more than Rs 10 lakhs irrespective of the number of years you have completed. This limit is also applicable to gratuity you would receive from different employers during your lifetime.

11. How many days does it take for the employer to remit the gratuity amount?

The government mandates employers to pay the gratuity amount within 30 days. Usually, the gratuity is released along with the full and final settlements of the employee. If there is a delay in payment, the employer has to pay a simple interest on the amount from the due date until the payment is made.

12. Where can I read more about the Payment of Gratuity Act 1972?

You read the rules pertaining to the Payment of gratuity act of 1972 here.