Gratuity rules in India

As per “THE PAYMENT OF GRATUITY ACT, 1972 ACT NO. 39 OF 1972”, employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments are eligible for gratuity.

Eligibily criteria for Gratuity

Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years.

 

 (a) on his superannuation, or

 

 (b) on his retirement or resignation, or

 

 (c) on his death or disablement due to accident or disease.

 

Completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement.In the case of death of the employee, gratuity payable to him shall be paid to his nominee. In case nominee is a minor, the share of such minor, shall be deposited with the controlling authority who shall invest the same for the benefit of such minor in such bank or other financial institution, until such minor attains majority

How is Gratuity amount calculated ?

For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days' wages based on the rate of wages last drawn by the employee concerned.Only basic salary and dearness allowance component of salary is considered while calculating gratuity.

 

                                                                           Gratuity Formula

            Gratuity amount= [ (Basic Pay + Dearness Allowance) x 15 days x No. of years of service ] / 26

 

Sample calculation

1.Basic Pay=Rs 20000

2.Dearness allowance =RS 5000

3.Years of service =10 yrs

 

Gratuity Amount=((20000+5000)*15*10)/26  = Rs 144230.76

 

Maximum amount under this act is capped at Rs 10,00,000 ,but employer can pay gratuity greater than Rs 10,00,000 but it will not be exempted.

Based on recommendation of seventh pay comission goverment has increased gratuity limit to Rs 20,00,000 for employees recruited post-2004

Hindustan times:Govt extends gratuity benefits to employees recruited post-Jan 2004

Tax on Gratuity amount

Lower of the below listed amount is exempt from income tax

  1. Amount calculated based on gratuity formula.

  2. Rs 10,000,00

 

If gratuity was received by the individual in any previous years and if exemption was claimed for the same, then the exempted amount gets reduced to the extent of exemption already allowed, subject to the overall limit of Rs 10 lakh.

Time required to get Gratuity amount
Conditions under which Gratuity can be forfeited

Gratuity can be forfeited if employee has been terminated:

  • or any act, willful omission or negligence causing any damage or loss to or destruction of any property belonging to the employer, to the extent of such loss or damage.

 

  • for riotous or disorderly conduct or any act of violence on his part.

 

  • For any act which constitutes an offence involving moral turpitude, provided the offence has been committed by him in the course of his employment.

     

     

     

The employer shall arrange to pay the amount of gratuity within thirty days from the date it becomes payable to the person to whom the gratuity is payable.

 

If the amount of gratuity payable the employer shall pay, from the date on which the gratuity becomes payable to the date on which it is paid, simple interest at such rate, not exceeding the rate notified by the Central Government from time to time for repayment of long-term deposits, No such interest shall be payable if the delay in the payment is due to the fault of the employee and the employer has obtained permission in writing from the controlling authority for the delayed payment on this ground.