Gratuity is to be paid by the employer to the employee when he leaves the company after working for five years. An employee can receive the gratuity payment in case he resigns or retires. The gratuity can only be received by the employee if there is no gap between the term of 5 years. The Payment of Gratuity Act, 1973, governs the payments related to gratuity.
Every factory, mine, oilfield, plantation, port, and railway company or shop employed or employing 10 or more than 10 employees on any single day of the preceding one year, is required to pay gratuity to the employees. Any employee completing a term of five years with the firm should be paid gratuity and any employee who has or has not completed 5 years of services but became disabled due to sickness or accident, is also liable to receive gratuity by the employee.
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How to Calculate Employee Payment of Gratuity?
The calculator of gratuity for those covered and not covered under the employee payment of Gratuity Act, 1972 differs a little.
Calculation of Gratuity for those Covered Under the Act
- Gratuity = (15 x last drawn salary x number of years of service) / 26
- where the last drawn salary includes basic and dearness allowance (DA)
For Example, if the salary of the employee is Rs. 1,00,000 (Salary and DA) and worked with the organization for 10 years and 7 months, then his Gratuity will be as follows: = (15 X 1,00,000 X 11) /26 = ₹6,34,615
Note: Nuber of years rounded off (10 years 5 months means 10 years and 10 years and 7 months means 11 years)
Calculation of Gratuity for those Not Covered Under the Act
- Gratuity = (15 x last drawn salary x number of years completed in-service) / 30
- Taking the same example, the employee will receive gratuity worth
(15 X 1,00,000 X 11) /26 = ₹5,00,000
Note: Nuber of years are not rounded off (10 years 5 months means 10 years and 10 years and 7 months means 10 years)
How the Tax on Employee Gratuity is Charged?
The gratuity received by the government employees is fully exempt from any taxes. The gratuity of a non-government employee is exempt as least of the following:
- Eligible gratuity amount (as calculated using the formulas mentioned above)
- ₹20 lakh
- Gratuity actually received
A tax will be charged on the sum received as gratuity above the figures mentioned according to the tax slab of the employee.
Who Receives Gratuity if an Employee Dies?
The nominee of the deceased employees receives the amount of gratuity in case of death. The condition of a 5-year tenure does not apply here. If the nominee is a minor, then his controlling authority will get the gratuity amount to invest accordingly till the minor becomes an adult.
