Gratuity calculated is a benefit that an employee receives for his services to a company or organisation. Here are the gratuity eligibility rules and the gratuity calculation process.

What is gratuity in salary?

Gratuity is a benefit that an employee receives for his services to a company or organisation. It is a kind of ‘gratitude’ amount that the company gives its employee.

It is usually paid on retirement but it can be paid before as well under certain circumstances.

Gratuity eligibility

It is mandatory for companies with more than 10 employees on their payrolls to give gratuity to an employee.

The employer is paid gratuity in salary when he completes five years of service with the employer or more.

The employer is also paid gratuity in case of resignation or retirement or if the person is laid off by the company.

In case of an employee’s death of disablement, there is no minimum gratuity eligibility period and the employee can be given the gratuity amount immediately.

Contractual employees are not entitled to gratuity in salary even after 5 years of service. However some companies offer all benefits to contractual employees.

How to calculate gratuity for private sector employees

As per the Payment of Gratuity Act, 1972, there is no fixed percentage for gratuity calculation. However, employers can use a formula to calculate their employees’ gratuity or they can even choose to pay a higher amount than that.

As per the Gratuity Act, private sector employees are divided under two categories:

• Employees covered under the Gratuity Act
• Employees not covered under the Gratuity Act

An employee will be covered under the Act if the organisation employs at least 10 people on a single day in the last 12 months. Once a company comes under the purview of the Gratuity Act, it will always remain covered even if the number of employees falls below 10.

Gratuity calculation 2019

How is gratuity calculated for employees covered under the Gratuity Act?

There is a gratuity calculation formula which is based on the 15 days of last drawn salary for each completed year of service or part thereof in excess of six months.

Gratuity calculator formula 2019 for employees covered under Act:

Gratuity = last drawn salary × 15/26 × no. of years of service

Here, last drawn salary = basic salary + dearness allowance

The average monthly salary is to be computed on the basis of the salary of the last 10 months immediately preceding the month (not the day) of retirement.

The ratio 15/26 represents 15 days out of 26 working days in a month.

According to this formula, the time period of over six months or more is considered as one year.

So, if an employee has worked for 7 years 8 months in a company, the working tenure will be considered 8 years. However, if an employee has worked for 4 years 3 months, the tenure will be considered as 4 years.

How is gratuity calculated for employees not covered under the Gratuity Act?

Employers are not restricted by any law from paying gratuity to employees even if the company is not covered under the Gratuity Act.

The gratuity calculation for employees not covered under the Gratuity Act is slightly different from those who are.

Gratuity calculator formula 2019 for employees not covered under Act:

Gratuity = last drawn salary × 15/30 × no. of years of service

In this case, the main difference is that only completed years of service are counted in the number of years of service of an employee.

So, if an employee has worked for 7 years 8 months in a company, the working tenure will be considered 7 years. If an employee has worked for 4 years 3 months, the tenure will be considered as 4 years.

Gratuity calculation in case of death

In the case of the death of an employee, he/she will get a gratuity amount based on the length of the service they provided.

Here is the gratuity eligibility for such cases:

• Less than one year of service: 2 times of basic pay
• One year or more but less than 5 years of service: 6 times of basic pay
• 5 years or more but less than 11 years of service: 12 times of basic pay
• 11 years or more but less than 20 years of service: 20 times of basic pay
• 20 years or more of service: Half of emoluments (salary) for every completed 6 monthly period subject to maximum of 33 times of emoluments

How is gratuity calculated in case of retirement

As per the government’s pensioner website, the gratuity amount in case of retirement is based on one-fourth of one month’s basic pay plus dearness allowance drawn before retirement for each completed six monthly period of a qualifying service.

The retirement gratuity is 16 times the basic pay with a maximum limit of Rs 20 lakh.

Gratuity is exempt from income tax

The gratuity amount for government employees is exempt from income tax.

For non-government employees, income tax rules are applicable on the gratuity amount depending on whether or not the employee is covered under the Payment of Gratuity Act, 1972 or not.

The maximum gratuity amount has a 20 lakh limit.

How is gratuity paid to employees?

The employer needs to pay his/her employee the gratuity amount within 30 days of it being billed.

If the employer fails to do that within 30 days, he/she has to pay simple interest on it from the date on which the gratuity becomes payable at the rate not exceeding the rate stipulated by the federal government.

Gratuity should be paid to the eligible employee in cash or even by bank cheque or demand draft if the employee so chooses.

When can gratuity not be paid by employers?

If an employee is fired for lawlessness or disorderly conduct or any other act of violence on his or her part, gratuity will not be paid to him/her.

If during the course of employment, an employee commits any act which constitutes an offense involving moral turpitude because of which he/she is fired, gratuity will not be paid to him/her.

If there is no termination order containing the above charges, the employer has to pay the gratuity amount to the employee.