It is payable:

On Superannuation (or) Retirement.

On your Resignation (or) Termination.

On death or Disablement due to accident or disease.

On Retrenchment (or) Layoff.

VRS (Voluntary Retirement Scheme).

The condition of five years of continuous service is not applicable if employee’s service is terminated due to death or disablement. Your nominee or legal heir can receive your gratuity amount (in the event of death of the employee).

Temporary staff, contract workers etc., are all eligible (except ‘apprentice’) for the gratuity amount, as long as they are considered as employees of the organization.

This is one the most frequently asked question and there are various conflicting views available on this one.

In one of the court cases, Madras High Court has held that an employee who has completed 4 years and 240 working days in 5th year will be entitled for gratuity i.e. 4 years 10 months and 11 days.

This judgment may or may not be applicable to you (it depends on the place of your establishment). It is better to contact your HR (Human Resource) personnel to get more clarity regarding this point.

How to calculate my gratuity amount, is also one the Frequently asked questions. It is calculated based on simple formula as below; (This formula is applicable to all the employees who are covered under the Payment of Gratuity Act, 1972.)

Gratuity = Last drawn salary * 15/26 * No. of completed years of service.

In the above gratuity calculation formula, the definition of ‘last drawn salary’ means, it comprises your Basic Salary + DA (Dearness Allowance if any).

How to treat number of months for the purpose of gratuity calculation after completion of 5 years? Any service which is in excess of 6 months is considered as one year. (Sixmonths and above means even 1 day extra after six months, you are eligible for 1 year gratuity. This is applicable only if you have completed 5 years of service) (Also note that service period calculation is not dependent on ‘5 days or 6 days’ in a week work rule.)

For example – If you have put in 11 years and seven months in an organization, your service period will be taken to be 12 years. But if your service tenure is 11 years and five months, then for the purpose of this calculation your tenure will be taken to be 11 years only.

For non-government employees (private company employees), who are not covered under the Gratuity Act, the formula for the calculation of gratuity amount is as below;

Gratuity = Average salary * 1⁄2 * No. of years of service

In the above gratuity calculation formula, the definition of ‘Average salary’ means, it comprises, your Basic Salary + DA (Dearness Allowance) + commission (as a percentage of turnover achieved by you, if any). To compute ‘Average Salary,’ you have to consider the average of last 10 months salary (Basic + DA + Commission) preceding the month of your retirement/resignation.

Kindly note that in this case, your service period will not be rounded off to the nearest full year. For instance, if you have a total service of 21 years and 10 months, only 21 years will be considered in the calculation.

Yes, there is a ceiling of Rs 20 Lakh as the maximum gratuity amount that you can receive. As per the above calculations, if you are eligible to get more than Rs 20 Lakh as gratuity, your company is bound to pay only Rs 20 Lakh. (In case your company wants to pay more than 20 Lakhs then they can pay it as performance bonus or ex Gratia.

The ceiling of Rs. 20 lakh applies to the aggregate of gratuity received from one or more employers in the same or different years .

Yes, you can give your nomination by filling Form “F” at the time of joining your company (during new joinee formalities). Employee can nominate one or more members of his/her family to receive the gratuity amount in the event of the death of the employee.

Even if your company is not doing financially well, your company is bound to pay gratuity amount. They cannot cite their ‘financial losses’ as the reason for the refusal.

But, an employer can refuse to pay the gratuity amount, if the services of an employee have been terminated for his/her riotous or disorderly conduct or any other act of violence on his part, during his/her employment. Employers can also deduct the cost of damages (if any) from the gratuity amount.

Gratuity is considered as your retirement benefit and is tax exempted subject to certain conditions of Income Tax Act. For the intent of taxation on gratuity, employees are divided into two categories:

Government Employees &

Private Sector Employees

Any gratuity amount received by an employee (Govt or Private employee) during his service is taxable. But when gratuity is received by the employee at the time of his retirement, death or superannuation then tax exemption rules for government employees differs from private employees.

In case of Government Employees the entire gratuity amount that he/she receives on retirement or on death is exempted from paying any Income tax.

In case of Private employees, they are divided as:

Private employees covered under the payment of Gratuity Act of 1972.

Private employees not covered under the payment of Gratuity Act of 1972.

In case, when private employees covered under the payment of Gratuity Act of 1972, any gratuity received is tax exempted to the extent of least of the following:

1. Statutory limit of Rs 20 Lakhs (Maximum limit / Govt notified amount)
2. Last drawn salary * 15/26 * No. of completed years of service
3. Actual Gratuity received by you.

If the gratuity exceeds the limit mentioned above, then it becomes taxable.

Example: Let us understand the above tax exemption rule with an example as under.

Mr. Shyam receives Rs 9 Lakhs as gratuity benefit from his employer. As per the Gratuity Act calculation, he is eligible to receive, let’s say Rs 5.5 Lakh. The maximum notified limit is Rs 20 Lakhs. Out of these, Rs 5.5 Lakhs is the least one. So, the tax exemption is limited to the extent of Rs 5.5 Lakhs only. Mr. Shyam has to pay income tax on Rs 3.5 Lakhs (Actual gratuity received – Tax exempted gratuity amount.)

For private employees not covered under the payment of Gratuity Act of 1972, any gratuity received is tax exempted to the extent least of the following:

1. Statutory limit of Rs 20 Lakhs
2. Gratuity = Average salary x 1⁄2 x No. of years of service
3. Actual gratuity received by you

(Where the gratuity was received in any one or more earlier previous years also and any exemption was allowed for the same, then the exemption to be allowed during the year gets reduced to the extent of exemption already allowed, the overall limit being Rs. 20 Lakhss)

Gratuity received by you on your retirement (or) during your service period is taxable under the head “Salary.” It should be shown under the head of “Salaries” while computing your ITR. This is applicable for both Government as well as Private employees.

Whereas, gratuity received by the legal heir (or) nominee is not taxable if the gratuity becomes due/sanctioned after the death of the employee. If the gratuity amount becomes due and paid before the death of the employee then it is taxable under the head ‘Income from Other Sources.’ The nominee / legal heir has to show it in ITR (Income Tax Returns)