# Gratuity | Meaning and Definition

## What is the meaning of gratuity?

Gratuity is a monetary benefit provided by an employer to an employee as a token of appreciation for the years of service rendered. It is governed by the Payment of Gratuity Act, 1972, in India. This act applies to establishments employing ten or more persons, and It serves as a form of financial security for employees during their retirement or when leaving a job after completing a certain tenure. According to the Payment of Gratuity Act, an employee who completed five years or more in the same organization is eligible to receive a gratuity amount.

## Who is Eligible for Gratuity?

Eligibility for gratuity depends on the completion of a certain period of continuous service with the same employer. According to the Payment of Gratuity Act, an employee becomes eligible for gratuity if they have completed a minimum of five years of continuous service. However, this condition is not applicable in cases of death or disability. Here is the eligibility criteria of an employee for getting this amount:

• Upon the retirement of an employee.

• When an employee resigns the job after five years of working for the same organization.

• Upon an employee’s sudden death or unexpected accident or illness.

• Superannuation of employees.

## How is Gratuity Calculated?

The gratuity amount is calculated based on a formula that takes into account the employee’s last drawn salary and the number of years of service completed. The formula is as follows:

Gratuity = (Last Drawn Salary × 15/26) × Number of Years of Service

Here, “Last Drawn Salary” refers to the basic salary and dearness allowance, and the fraction of the year is rounded to the nearest whole number.

## Example of Gratuity Calculation?

Let us explore the calculation with an example. Consider X is an employee who worked for the organization named Y for twenty years. X has an amount of 25,000 rs/- (last drawn salary and the dearness allowance) in his hand; what is the amount received by employee X?

Amount received by X = 20 * 25,000 * 15/26

The amount earned by employee X will be 2,88,461.54 Rs/

## Gratuity Calculator

To simplify the calculation process, many online gratuity calculators are available. These calculators typically require information such as the employee’s last drawn salary, the number of years of service, and any additional inputs as required by the specific calculator. The gratuity calculator works on the same formula to calculate the amount of gratuity received.  It is free and simple to use and employers and employees can use these tools to estimate the gratuity amount accurately.

## Taxation Rules for Gratuity

Gratuity is subject to tax, but the tax treatment varies based on whether the employer is covered under the Payment of Gratuity Act or not. For establishments covered by the act, the gratuity amount is exempt from tax up to a certain limit, which is currently set at ₹20 lakhs. Any amount exceeding this limit is taxable.

For establishments not covered by the act, the tax exemption is limited to the least of the following three amounts:

2. 15 days’ salary for each completed year of service
3. ₹10 lakhs

It’s essential to consult with a tax advisor to understand the specific tax implications based on individual circumstances and prevailing tax laws.

It is the amount paid by the employer to their employee for serving more than 5 years with the company.

Employees who have completed a minimum of five years of continuous service with the same employer are eligible for gratuity. However, this condition is waived in cases of death or disability.

As of the current regulations, the maximum tax-free gratuity limit is ₹20 lakhs. Any amount beyond this is taxable.

Generally, gratuity is not applicable if an employee resigns before completing five years of continuous service. However, there are exceptions such as death or disability.

Yes, an employee can approach the labor department or file a case in the labor court if the employer refuses to pay gratuity despite meeting the eligibility criteria.

Gratuity is calculated based on the employee’s basic salary and dearness allowance. Variable pay or bonuses are generally not considered in the calculation.

A PF account receives contribution from both employee and the employer whereas gratuity is paid by employer only.

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