The payment of gratuity is governed by the Gratuity Act, 1971. The amount of gratuity is usually receivable at the time of retirement. However, in certain circumstances, it can be receivable upon resignation or superannuation. While an employee becomes eligible for gratuity upon continuous service of five years, such continuous service is not mandatory in case of death, illness or disability of the employee during his period of service.
Every organisation, both government and non-government are bound to pay employees gratuity, however, non-government organisations will not have to pay such a benefit in case they don’t fall under the purview of the Gratuity Act or if the organisation is a factory. A non-government organisation will fall under the purview of the Act if it has a minimum of 10 employees on any given day in the preceding twelve months.
In case the organisation does not fall under the Gratuity law, there is no law that restricts the payment of gratuity to the company’s employees. The organisation can still choose to pay gratuity to an employee.
While there is no specified percentage specified under the law, a formula can be used to calculate the amount of gratuity the employee is entitled to.
The amount of Gratuity payable depends on:
The formula for gratuity is based on an employee’s last drawn salary. The number of years of service would refer to each completed year (12 full months). A partial year of service will be considered as a full year of service, only if the employee is served for more than 6 months in that partial year.
Gratuity = 15 x (last drawn salary/26) x number of years of service
Jai has worked in an organisation with over 30 employees for the last 6 years and 8 months. His last drawn basic salary was Rs 40,000 and dearness allowance was 5,000. Since he works in an organisation covered under the Gratuity Act, the gratuity he is entitled to would be:
= 15 x (last drawn salary/26) x number of years of service
= 15 x [(basic salary + dearness allowance)/26] x 6years 8months
= 15 x (45000/26) x 7
= INR 1,81,731
The Payment of Gratuity Amendment Bill introduced in 2017, proposed a change in the ceiling cap for gratuity for non-government employees. The tax-free exemption for both private and public sector employees, including autonomous bodies, is to be raised from the current Rupees 10 lakhs to 20 lakhs, in par with that of government employees.
Central government employees have been enjoying a tax-free gratuity limit of Rs 20 lakhs since 2016. However, when a central/state/ local government employee receives gratuity on retirement or death, such benefit is fully exempt from tax.