13 FAQs on Gratuity Benefit Amount & Tax Implications

The general meaning of Gratuity is – ‘a favor or gift, usually in the form of money, given in return for service.’ In employment terms, Gratuity Benefit amount is similar to a bonus, meaning that it is a portion of your salary provided to you, by your employer, for the services rendered on the company’s behalf. Gratuity is a reward for your long and meritorious service.

Gratuity is a defined benefit plan and is one of your retirement benefits offered by your employer. You can generally find Gratuity eligibility details in your CTC (Cost to Company)or Company’s offer letter.

(Meaning of Defined Benefit Scheme is – A plan/scheme in which a certain amount or percentage of money is set aside each year by a company for the benefit of the employee. Gratuity is a defined benefit plan. )

Earlier, it was not compulsory for an employer to reward his employee at the time of his retirement or resignation. But in 1972 the Government passed the Payment of Gratuity Act and made it mandatory for all the employers with more than 10 employees to pay gratuity.Gratuity Benefit Amount Bonus

In this post, let us understand about – what is gratuity? How to calculate the gratuity benefit due amount? What is the formula to calculate? Is gratuity amount taxable? What is the applicable tax exemption limit on gratuity benefits? How to calculate the gratuity amount online? What are the income tax implications?

13 FAQs (Frequently Asked Questions) on Gratuity Benefit Amount

FAQ 1 – Am I eligible to receive Employees Gratuity Benefit Amount?

After completing five years of continuous service with the same company, you are eligible to receive the gratuity benefit. Gratuity shall be payable to ‘you’ (employee) on the termination of your employment after rendering continuous service for not less than five years.

FAQ 2 – When is Gratuity Amount paid?

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).

(You can check your ‘Full & Final Settlement’ papers to know if you have received the gratuity amount or not.)

FAQ 3 – Is five years continuous service rule applicable to all the above events?

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).

FAQ 4 – Are Temporary staff or Contract workers eligible to receive Gratuity amount?

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.

FAQ 5 – Is 4 years 10 months (any period above 4.5 years of service) considered as 5 years?

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.

FAQ 6 – How is Gratuity Benefit Amount Calculated? (For the employees who are covered under Gratuity Act)

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. (Six months 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.

FAQ 7 – How is Gratuity Benefit Amount Calculated? (For the employees who are not covered under Gratuity Act)

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 * ½ * 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.

FAQ 8 – What is the maximum amount that I can receive as Gratuity Benefit?

Yes, there is a ceiling of Rs 10 Lakh 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 10 Lakh 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 L 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 .


Latest update : The 7th CPC (Central Pay Commission)increased Gratuity Ceiling limit from Rs 10 Lakh to Rs 20 Lakh w.e.f 01-Jan-2016.

Latest News (25-02-2017) : The Central Govt has agreed to raise the ceiling limit of Gratuity amount for Private Sector (organized) employees also, from Rs 10 Lakh to Rs 20 Lakh. The Union Labor Ministry is expected to bring a formal amendment to the Payment of Gratuity Act to implement the change.

Latest update (22-March-2018) : The Parliament has passed the Payment of Gratuity (Amendment) bill which will increase the ceiling limit amount to Rs 20 Lakh from the exiting Rs 10 Lakh. This is applicable for central govt employees and also private sector employees (organisedsectors).

Latest News (29-Mar-2018) : The President has given his assent to the Payment of Gratuity (Amendment) Act, 2018 and this Act would now be effective from 29th March, 2018.


FAQ 9 – How to calculate my Gratuity Benefit amount online?

If you are not comfortable in calculating your gratuity due amount using the above formulas, there are lot of online gratuity calculators that are available. You may consider using the below ones;

FAQ 10 – Is Nomination facility available?

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.

FAQ 11 – My company is not paying gratuity due to financial Loss, can it refuse to pay?

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.

FAQ 12 – Is my Gratuity Amount Taxable in India? Does Employees Gratuity Benefit has any tax exemption?

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 10 lakh Rs 20 Lakh . (Maximum limit / Govt notified amount)
  2. Last drawn salary * 15/26 * No. of completed years of service.(Refer FAQ 6 )
  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. Mr Sundaram receives Rs 9 Lakh 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 Lakh. Out of these, Rs 5.5 Lakh is the least one. So, the tax exemption is limited to the extent of Rs 5.5 Lakh only. Mr Sundaram has to pay income tax on Rs 3.5 Lakh (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.10 lakhs Rs 20 Lakh .
  2. Gratuity = Average salary x ½ x No. of years of service. (Refer FAQ 7)
  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 Lakh.)

FAQ 13 – Gratuity received by Employee/nominee/legal heir : Taxable under what ‘head’ of income tax?

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).

So, gratuity benefit amount is not fully exempted from income tax. Be extra cautious while calculating the tax exemption limit that is applicable on your gratuity amount. Do check if you have to pay taxes when you receive your gratuity. Kindly share your comments.

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( Image courtesy of Stuart Miles at FreeDigitalPhotos.net)

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  • PKSinghal says:

    I was superannuated in May 22 from CPSUs. However, my gratuity was withheld as some disciplinary proceeding were underway as per CDA rules of the company. Now disciplinary proceedings are completed. Now, can I claim gratuity amount with interest. If yes pl quote rule.
    regards

  • shashikala says:

    Hi Sreekant Reddy

    Thanks for your concerns and right responses to the doubts they asked for.

    If an employee is retired and he is getting consolidated amount (salary is not reduced, but paying together), and the person is relieving after 3 years of his retirement, on what we can calculate Gratuity?

    Please help me

    Thank you

  • Anil says:

    Dear Shree,

    Kindly guide, if a person has completed more than 10 years of service does his gratuity doubles I mean to say a instead of half of (basic + DA) * number of years, will he get complete basic+DA * number of years.

  • Subodh Banthia says:

    I have recently resigned after a continuous service of 7 years. My employer is refusing to pay the gratuitty saying that when I joined the company I was 60+ and so the gratuity is not payable to me. Please advise and also guide if there is any provision that prevents or limits the payment of gratuity to 60+ employees.

    • Sreekanth Reddy says:

      Dear Subodh,
      Generally, organizations fixes superannuation age 58 to 60 years.

      Even though the retirement age is fixed as 60 years in general, this can be extended in special conditions based on Company HR Rules. Hence an employee getting relieved from service even after 60 years, are eligible for if it complies with the company rules.

  • Waleed says:

    Hi Sreekanth,

    I am working for my company for more than 5 years now. However, I was deployed outside India for a year in between (For the the same company) but was given a new offer letter for Visa. Will that be considered as discontinuation from services and will I not be eligible for gratuity?

  • shirvankar says:

    if a company has not implemented gratuity from last 20 year due to, initial less then 10 employee and later due to various reason. now company is planning to established gratuity so what will the procedure &the employee who have retire or resign before, what to do with them

  • Harsh Vardhan Jhala says:

    My CTC is reduced by 50% due to covid crises. so my last Salary is reduced,
    If I resign now, will I get my gratuity calculated on reduced(last salary) amount or on my maximum salary amount ?

  • KASHYAP BHARAT says:

    TO RESTRICT GRATUITY UP TO RS. 20.00LACS, I, THINK IT IS CURB THE GROWTH
    OF ECONOMY ,IF SOME ONE IS ELIGIBLE TO GRATUITY RS MORE THEN RS. 20.00LACS THEN WHAT.

  • ravi says:

    Hi Srikanth,

    After 5 years of working my company changes the basic salary from 50% to 40% and it will effect my gratuity amount. is this any rule ? can you help me out

    • Sreekanth Reddy says:

      Dear Ravi,
      Basic salary is part of gratuity calculation formula. So, it will have an impact. Kindly check with your employer.

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

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

      For example, if the basic plus dearness allowance was Rs 20,000 and the person has completed eight years of service, the gratuity will be equal to (15/26 x last drawn salary x years of service) Rs 92,307. If there is a salary cut of 20%, then it will go down to Rs 73,846.

  • Rahul Bhatikar says:

    Hi Sreekanth ! I have completed 5yrs 6 months in my current organization (which i quit recently). My question to you is on the no. of employees required to be in any organization for being eligible to claim gratuity. When i joined this company in year 2014 we were only 6 employees but following year(Oct-Nov’15) the company had 10+ employees. Will I be eligible for claiming gratuity .

  • Srikanth Reddy says:

    My company registered at 06/04/2015 and now it’s 4.9 years completed. I am started working from 01/01/2015 till date and i have completed 5 years. am i eligible for gratuity.

  • Ahamed says:

    Hello Sree,

    Thank you for helping people when they need it badly in critical situations.

    I have question of mine. I have 6.9 years experience in the same company but company has changed its name in the middle for 2 times ,As per official records of company registration shows that they are under 5 year old company but i have offer letter and other things in old name of the company. Am i eligible for gratuity ? .like me another 2 peoples waiting to get gratuity for 8 and 9 years services .

    Now they claims that they are under 5 years old company and rejecting the claims or ready to pay half of the amount .

    Give us best possible way to approach this .

    • Sreekanth Reddy says:

      Dear Ahamed,
      If they are ready to pay half amount then it sound something may be fishy..

      Has the Service continuity thing been mentioned in your Appointment letters on Name Change??

      If the clause is not mentioned, you may not be eligible.

      However,if you have proper evidence and you could adduce before the Controller under Payment Of Gratuity Act, that both XYZ company and ABC company are one and the same and the owners / proprietors / directors are same, and the name of the company has been changed for other reasons, you may have the case to your advantage.

  • Vikrant says:

    I am working subsidiary company of main Manufacturing company (Group of Company) . By legally both entities are separate. But recently my management transfer me from Subsidiary company payroll to main manufacturing company payroll, my spend working tenure is in subsidiary company more than 6 years.My question is should i liable to get gratuity from my subsidiary company in case of transfer?? Please help

  • pushpa says:

    What if company decides to start a new company with same employees and closes all financial of the old company which was started 10yrs back.

    Query:
    Whether the employer should pay gratuity if any employees completes more than 5years in old company name or he should be considered as a continuous service as he works under same employer’s company and gets his gratuity pay when he resigns/retired.

    • Sreekanth Reddy says:

      Dear pushpa,
      It all depends on how the company plans their re-structuring.
      If they are starting a new company totally then they may have to pay the Gratuity amount.

      Employees can check with the employer!

  • Anuj Singh says:

    If a employee get promoted on last day of his service, and basic change on promotion. old Basis 26330(for 30 days) New basic 27120(for one day). What would be the last drawn salary.

    • Sreekanth Reddy says:

      Dear Anuj,
      The last drawn salary calculation is dependent on whether an employee comes under the establishment covered under gratuity or not.

  • Kamal Bansal says:

    Dear Sree will the enhanced benefit of Gratuity of Rs. 20 Lakh will be applicable to the PSU employee who has received the gratuity after 29.03.2018 but resigned on 27.03.2018.

  • SUNDARI says:

    Hi Sreekanth,
    I was working for Railways for 8 years and then joined another central govt dept where gratuity is paid maximum 20 lakhs for 20 years and for remaining service 15 days salary for one year completed year of service. I was not paid gratuity in railways. Can I ask the present employer to include the past service of 8 years for purpose of gratuity. inclusion of past service is being followed.

  • Mitali Bisht says:

    Is notice period also included in the gratuity period ?

    I have completed 59 months of service in my current company. Will the 60th month of my notice period be considered for gratuity as 5 years Clause is there ??

    • Sreekanth Reddy says:

      Dear Mitali,
      Yes. Your service is counted till the last working day that you worked when you were relieved and that includes the notice period for which you do get your salary. … Hence, notice period will be considered during gratuity calculations.

      • Sourav says:

        I started working in a organisation and then resigned from there and joined in another organisation but both the companies are under same group, will i get gratuatity as i have completed total 5yrs in both organisation combined in same group.

  • SP says:

    Hi Sreekanth.. all your responses are very helpful. I have a question wrt the taxability of Gratuity payable. Currently the statutory requirement is 4 yrs. 10 months 11 days; with a 20 Lk ceiling…. however, if a company takes a stand to pay gratuity on the completion of 2 years – is the gratuity payable tax exempt?

    • Sreekanth Reddy says:

      Dear SP,
      Very good question/point!
      I think it would be tax-exempt.
      You may also re-check this with a CA.

  • T.C. Arora says:

    Sir,
    Gratuity is just like a security to life and this is paid at the time of retirement and earlier there was no difference between govt. employees and others like date of implementation, amount and service period. But this time Govt. have created disparity between employees i.e. govt. employees, govt.owned companies’ employees and pvt.sector employees.

  • Azim says:

    Need to know the nuances about
    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.

    Based on the above Private unaided School teacher will falls under which category

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

    • Sreekanth Reddy says:

      Dear Azim,
      The Act is applicable to those establishments where 10 or more employees work on any single day in the preceding 12 months of the year. The Act also states that once an establishment is covered under its ambit then it will always be covered, even if the number of employees falls below 10.

      If the organisation is not covered under the Act then it can make an ex-gratia payment to its employees.

  • Sandeep Rai says:

    Thanks for writing such a descriptive information about gratuity.
    Here i have one question – is an employee eligible for gratuity due to death his tenure was only 4 months? if yes than what would be the calculation.

    • Sreekanth Reddy says:

      Dear Sandeep,
      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).

      For calculation formula, kindly refer to the points given in the above article.

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