Gratuity, in simple terms, is the amount your employer pays you for working with them for five years or more. This extra sum is considered an additional benefit and is seen as a reward for your loyalty and service. In this blog, we will address the questions that we, as common individuals, often have in mind when joining any organisation, such as: What is gratuity in salary, and what are the eligibility criteria for gratuity?
A gratuity is a special monetary reward given to employees who have worked full-time at a company for over five years. The Payment of Gratuity Act of 1972 regulates this practice.
Let us understand the gratuity meaning in salary!
- Gratuity Meaning as per Gratuity Act of 1972
- Key Factors Affecting Gratuity
- Eligibility Criteria for Gratuity
- Gratuity Contribution by Employer
- Gratuity Calculation- For Organizations Covered by the Gratuity Act of 1972
- Tax on Gratuity
- Employer’s Responsibilities
- Can an Employer Refuse to Pay Gratuity?
- FAQs| What is Gratuity Meaning
Gratuity Meaning as per Gratuity Act of 1972
Gratuity is a financial acknowledgement employers give to employees who have served at least five years. The Payment of Gratuity Act of 1972 applies to sectors like government, defence, local bodies, and some private firms meeting specified criteria.
These gratuity benefits are given during key life events such as retirement, resignation, disability, or death. Eligibility requires completing at least five years of continuous service with the same employer. However, as per the latest gratuity benefits, you can get a gratuity if you complete 240 days of work in your fifth year!
Please Note: This rule doesn’t apply if an employee passes away or becomes disabled. In those cases, the person nominated by the employee (like a family member) gets the gratuity. Also, interns and temporary workers don’t qualify for gratuity since their jobs are usually for a fixed time or project.
Key Factors Affecting Gratuity
In India, the gratuity amount is influenced by several factors, as per the Payment of Gratuity Act, 1972.
- Last Drawn Salary
The gratuity amount mainly depends on your last drawn salary. This includes basic pay plus dearness allowance.
- Years of Service
The number of years you have served in the company is crucial. You need to have worked for at least five years, except in cases of death or disablement.
- Maximum Limit:
The law caps the maximum gratuity amount at INR 20 lakhs. Any amount exceeding this is considered ex-gratia.
- Rounding Off Tenure
If the service period in the last year is more than six months, it is rounded off to the nearest full year.
For example, a tenure of 16 years and 7 months is considered 17 years for gratuity calculation.
- Forfeiture of Gratuity
Your company may cancel your gratuity wholly or partially on termination of your service due to any act, willful omission, or negligence causing damage or loss to property belonging to the employer.
Eligibility Criteria for Gratuity
Gratuity is paid not just at retirement but also in other situations. These can include superannuation, resignation, death or disablement, voluntary retirement, etc.
However, every employer follows the below eligibility criteria for gratuity payments:
- If you’ve worked steadily for 5 years in the same company, you’re eligible for gratuity when you resign or retire.
- Companies need at least 10 employees to qualify for gratuity benefits.
- If you are eligible for superannuation.
- If you face a disability or sadly pass away, even before completing 5 years, you or your nominee can still receive full gratuity.
Gratuity Contribution by Employer
Employers can either pay the gratuity amount from their company’s funds. Alternatively, they can opt for an insurance provider offering a general gratuity insurance plan. The entire gratuity amount is covered by the employer and is not deducted from the employee’s salary.
As per regulations under the Gratuity Act, employers must disclose the gratuity contribution in the CTC. This ensures it is an additional component of the employee’s salary.
While there’s no specific set percentage for gratuity contribution, regulations suggest a standard gratuity of at least 50% of the employee’s basic salary, excluding other CTC components like allowances.
Gratuity Calculation- For Organizations Covered by the Gratuity Act of 1972
If your workplace follows the Gratuity Act, and you’ve worked for more than 5 years, your gratuity formula shall be:
Formula for Gratuity= (15×Last Drawn Salary×Years of Service) / 26)
Let’s take an example:
Mr. A worked at XYZ Company for 11 years and 7 months, with a last-drawn salary of
INR 55,000.
Mr. A’s Gratuity Amount= (15×55,000×12)/ 26 = INR 380,769
For Organizations Not Covered by the Gratuity Act
If your workplace isn’t under the Gratuity Act, the gratuity formula changes a bit:
Formula for Gratuity= (15×Last Drawn Salary×Completed Years of Service) /30
For instance, Mr. B worked at LMN Company for 15 years and 8 months, with a last drawn salary of INR 40,000.
Mr. B’s Gratuity Amount= (15×40,000×16) / 30 = INR 3, 20,000
Gratuity Calculation in the Event of Employee Death
In the unfortunate event of an employee’s demise, the gratuity amount goes to the nominee. Calculated based on the employee’s tenure, it has a maximum limit of ₹20 lakh.
The following table outlines the gratuity amount payable by the employer in case of an employee’s death:
| Tenure of Service | Gratuity Amount Payable |
| Less than one year | Two times the basic salary |
| More than one year but less than five years | Six times the basic salary |
| More than five years but less than 11 years | 12 times the basic salary |
| More than 11 years but less than 20 years | 20 times the basic salary |
| 20 years or more | Half of the basic salary for each completed six-month period, subject to a maximum limit |
Tax on Gratuity
The tax rules for gratuity in India depend on the type of employee and the amount of gratuity received.
There are two types of employees for calculating tax on gratuity:
- Government employees
- Private employees.
Tax on Gratuity for Government Employees
If you are a government employee, you are in luck. The entire gratuity contribution from the employer is exempt from income tax. You do not have to pay any tax on your gratuity amount, irrespective of the amount or the number of times you receive it.
Tax on Gratuity for Private Employees
If you are a private employee, you have to follow some rules to claim tax exemption on your gratuity amount. First of all, you have to be covered under the Payment of Gratuity Act 1972. This act applies to every factory, mine, oilfield, plantation, port, railway company, and shop or establishment employing 10 or more persons.
For private employees covered under the Gratuity Act, the least of the following three amounts is exempt from income tax:
• The eligible gratuity calculated as last salary (basic + DA) number of years of employment 15/26
• The actual amount of gratuity received
• Rs. 20 lakh
Read- Mistakes that you must avoid while filing your income tax returns.
Employer’s Responsibilities
Employers in India have specific duties under the Payment of Gratuity Act, 1972 regarding gratuity payments:
- Employers must inform employees of the amount of gratuity due and make arrangements for payment.
- Maintaining accurate records of the employee’s tenure and gratuity payments is mandatory.
- Gratuity should be paid within 30 days from the date it becomes payable.
- If the employer fails to pay gratuity within the specified time, they are liable to pay interest on the amount due.
Gratuity Calculator
You can use an online gratuity calculator to estimate the gratuity in salary that you will receive. Gratuity calculators are online tools that estimate the gratuity amount based on inputs like the last drawn salary and years of service.
They are user-friendly and provide quick results.
Do you know?
You can use your gratuity benefits by investing in multiple ways!
Check this out!
Investment Options for Gratuity
Upon receiving a gratuity, here are several investment options for employees:
- Fixed Deposits (FDs)- They offer a safe investment with guaranteed returns.
- Mutual Funds: These provide potentially higher returns than FDs but come with market risks.
Invest in mutual funds, stocks, ETFs, etc, all at zero brokerage!
- Public Provident Fund (PPF): A long-term investment option backed by the Government of India.
Can an Employer Refuse to Pay Gratuity?
Certainly, an employer can refuse to pay gratuity under specific circumstances. For example, if an employee is terminated for misconduct, such as violent behaviour or illegal activities, the employer can withhold part or all of the gratuity based on the damage caused.
FAQs| What is Gratuity Meaning
A gratuity is a gesture of appreciation in the form of a monetary benefit that employers pay to employees upon retirement, resignation, or death; however, it is subject to applicable rules as per the Gratuity Act.
Paying gratuity involves giving a lump sum amount to an employee based on their last salary and years of service.
Yes, there is a limit. Government and private employees covered by the Gratuity Act have a maximum limit of Rs. 20 lakh, while for non-covered private employees, it’s Rs. 10 lakh.
PF is a monthly savings scheme mandatory for employees earning up to Rs. 15,000, while gratuity is a one-time payment during exit. However, it can also be paid on demise.
In the event of an employee’s death, a gratuity is paid to the nominee or legal heir. The application must be made within one year of death, and the employer should pay within 30 days of receiving it.
Gratuity is not a standard part of CTC but may be included by some companies as a benefit. It’s paid separately from salary after 5 years of service.
Source – clc.gov.in
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.