Will you receive gratuity if you took a service break? 

How much gratuity will you get at retirement? Is it taxable? More gratuity for a long service period?

These are some questions about the Gratuity that most of us don’t know much about.. In this edition, we demystify the rules and calculation of gratuity.

Gratuity Rules

Gratuity is the monetary amount which is payable to the employee of an organisation under the Payment of Gratuity Act 1972. It is mainly paid to the employee as a token of appreciation for his/her services towards the company.

Payment of Gratuity Act 1972 is applicable to

• Every factory, mine,oilfield, plantation, port and railway company 

• Every shop or establishment within the meaning of any law for the time being in force in relation to shops and establishments in a state, in which ten or more persons are employed, or were employed, on any day of the preceding twelve months

Applicability 

• Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years.

1. on his superannuation; or
2. on his retirement or resignation; or
3. on his death or disablement due to accident or disease; or
4. on termination of his contract period under fixed term employment; or 

Continuous Service

An employee of  one year or six  months, he shall be deemed to be in continuous service under the employer if 

1. The employee during the period of twelve calendar months preceding the date with reference to which calculation is to be made, has actually worked under the employer for not less than

(i) 190 days (below ground, 5 day week)

(ii) 240 days, in any other case

1. If the employee during the period of six calendar months preceding the date with reference to which calculation is to be made, has actually worked under the employer for not less than

(i)  95 days (employed below the ground in a mine or in an establishment which works for less than six days in a week)

(ii) 120 days, in any other case

Inclusive of sick and paid leaves.

Gratuity Wage  

For gratuity “wages” includes all emoluments which are payable to the employee in cash except bonus, commission, HRA, overtime wages and any other allowance. So, Wages = Basic + DA

• Piece Rate

Daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the termination/resignation, for this purpose the wages paid for any overtime work shall not be taken into account.

• Month Rate

Wages shall be calculated by dividing the monthly rate of the wages last drawn by him by 26 and multiplying the quotient by 15 (4.81%).

• Seasonal Establishment 

An employee who is not employed throughout the year, the employer shall pay the gratuity at the rate of 7 days’ wages for each season.

Calculation

• For every completed year of service or part thereof of in excess of six months, the employer shall pay gratuity to an employee at the rate of 15 days’ wages based on the rate of wages last drawn by the employee concerned”. For example, 5 years+ 6 months = 6 years

• Gratuity is to be calculated on last drawn rate of wage

• 15 days payment is to be made for every year of service

• The statutory limit of gratuity payable to an employee is 20 lacs and shall be paid within 30 days from the date it becomes payable.

• The gratuity amount is tax free. However, an employer can pay more but the amount exceeding 20 lacs will not be income tax exempt.

So, Gratuity = Daily Wage* 15* Years of Service

For example, you have worked with the XYZ company for a period of 20 years. Your last drawn basic salary along with dearness allowance was Rs 30,000. 

The amount of gratuity = 1000 * 15* 20 = Rs 300,000

Is all this calculation overwhelming?

No worries, we have got you covered! Here is a Gratuity  Calculator to help you calculate your Gratuity  amount at the time of retirement. 💰