After completing a specific duration of employment at one organization, salaried employees—except temporary or contractual employees—are eligible for gratuity payments.
After completing five years of continuous service at one organization, an employee is qualified to receive a gratuity amount under the Gratuity Act of 1972.
When an employee retires, resigns, or is laid off, they are given their gratuity payment.
According to Section 4 of the Gratuity Act, the requirement of five years of continuous service is not applicable in cases where employment is terminated owing to a person's death or disability.
The nominee or the employee's legal heir will receive the gratuity payment in the event of the employee's passing.
All organizations, including factories, mines, oil fields, plantations, ports, railroads, motor transport undertakings, businesses, stores, and places with more than 10 employees are subject to the Gratuity Act of 1972.
Time Frame:
As per the rules in place, the employee has 30 days from the date the gratuity becomes payable to apply for it.
An application that is submitted after the 30 days cannot be rejected by an employer.
Within 15 days after receiving the application for the gratuity amount, the employer must identify the amount due and the date of payment.
If a gratuity application is turned down, the employer is required to provide a reason.
Gratuity Calculation:
The amount of the gratuity that an employee receives is determined by their length of service and their most recent paycheck. Based on the basic pay and the dearness allowance, it is determined.
For the organizations covered by the Gratuity Act of 1972, a month consists of 26 days when calculating gratuities.
Every 15 days after a year of service has been completed, a gratuity is given. If an individual works for more than six months during their final year of employment, the number will be rounded up to the next number.
To calculate gratuities, an employee's total service time will be regarded as nine years, regardless of whether it was eight years or seven months.
Calculation of the gratuity:
15/26 * Number of completed years of employment * Last drawn wage (basic salary plus dearness allowance).
The gratuity payment is also available to employees of organizations not covered by the Gratuity Act. In such circumstances, a month will have a total of 30 days.
Tax Exemption:
Government personnel are entitled to a full exemption from income tax on all gratuities they receive.
Depending on whether employees are covered by the Gratuity Act of 1972 or not, income tax regulations on gratuities apply to workers in the private sector.
The applicable income tax exemption on gratuities received is the smallest of the following for private sector employees protected by the Gratuity Act:
- The government's imposed upper limit, which is now set at 20 lakh
- years of service * 15/26 * last drawn salary
- Actual gratuity received
The income tax exemption cap is the lowest of the following for employees in the private sector who are not covered by the Payment of Gratuity Act:
- Last 10 month's average salary (basic + DA) x number of years of employment x 1/2
- Rs 10 lakh
- Gratuity received
