GRATUITY: How To Calculate, Formula, Eligibility & Tax Exemption for 2023 with Downloadable Calculator

What Is Gratuity?

Gratuity is given to you by your employer for the services rendered by you. It is paid by both public and private sector employers. It is included in your salary as Cost to the Company (CTC). It is 4.81% of the basic salary. This is for being associated with the company for a long time.

Table Of Contents

• Are you eligible for a Gratuity?
• How is the five years service calculated?
• What is continuous service?
• To whom gratuity is payable?
• When is the Gratuity payable?
• Calculation of Gratuity
• Gratuity Act 1972
• Tax exemptions on Gratuity
• What if you are unable to complete five years of service due to death or disablement?
• How gratuity is calculated in case of death?
• When is gratuity not paid?
• What are the gratuity payment rules?
• What forms are to be used in gratuity?
• Employers have a right to forfeit gratuity
• Conclusion

Are you eligible for a Gratuity?

Discover if you are eligible for gratuity.

If your company’s employees are more than 10 and if you complete a minimum of 5 years of continuous service, then you are eligible. Once employee strength reaches 10, then even if it reduces later, you will be eligible. Temporary staff, contract workers, etc, are also eligible, as long as they are considered employees. However, apprentices will not eligible. If you are transferred overseas on an assignment, you will still be eligible for Gratuity.

How is the five years service calculated?

Find out what these 5 years mean.

You should have worked for 190 days out of 365 days in case you work below the ground. All mining activities fall under this. In case you work above the ground, you should have worked for 240 days out of 365 days.

What is continuous service?

Any disturbance in employment due to the following reasons will not affect you and you will be deemed to be in continuous service. They include:

• Sickness
• Accident
• Leave
• Layoff
• Strike
• Lockout
• Termination of work not due to your fault

To whom gratuity is payable?

Do you think only employees are paid gratuity? See who is in this list

1) Employee
2) Nominee or heir: In case of death, it is paid to the nominee and if no nomination is made it is paid to the heir.

3) Controlling authority: If the nominee or heir is minor then it is deposited with controlling authority who will invest in bank or other financial institution, as may be prescribed until such minor becomes major.

When is the Gratuity payable?

When do you think gratuity is paid? It can be paid during any of the following:

✔ Resignation
✔ Retirement
✔ Voluntary Retirement Scheme (VRS)
✔ Retrenchment lay off
✔ Disability or death due to disease or accident

Calculation of gratuity in 2023

You can calculate the gratuity payable in 2023 using the below steps.

To calculate gratuity there are two factors. What are the factors that gratuity depends on?

Gratuity depends on:

👉 Last drawn salary
👉 Years of service

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Gratuity Act 1972

Have you heard of the Payment of Gratuity Act?

This Act was passed in the year 1972 and covers employees engaged in mines, factories, oil fields, plantations, companies, ports and such establishments that have more than 10 employees.

They have divided non-government employees into two:

⭐️ Employees covered under the Act
⭐️ Employees not covered under the Act

Are you covered under the Act? Check out if you are covered.

You will be covered under the Act if the organization employs at least 10 people on a single day in the preceding 12 months. If an organization falls under this Act, then it will always remain covered even if the number of employees falls below 10.

Find how gratuity is calculated for Employees covered under the Act

⭐️ Employees covered under the Act

The Formula is as follows:

Gratuity = (Last drawn salary X no.of completed years of service X 15) / 26

The last drawn salary includes basic salary, dearness allowance, and commission on sales.

Example: Mr. A’s last drawn salary is Rs.80,000 per month and he has worked with ABC Ltd for 20 years and 7 months.

(15 X 80,000 X 21)/26 = Rs. 9.69 lakh

Here we take 21 years as Mr. A has worked for more than 6 months in a year, i.e. 20 years and 7 months.

For the no. of months in the last year of employment, anything above 6 months is rounded off to the next number and anything below 6 months is rounded off to the actual no. of years not taking the months. So a job for 6 years and 7 months will fetch you 7 years gratuity, and a job for 6 years and 4 months will fetch you 6 years gratuity.

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Now find how gratuity is calculated for Employees not covered under the Act

⭐️ Employees not covered under the Act

The Formula is as follows:

Gratuity= (Last 10 months average salary X no.of completed years of service X 15)/30

Salary includes basic, dearness allowance and commission on sales.

In the above example, If Mr. A’s organization was not covered under the Act, then

(15 X 80,000 X 20)/30 = Rs.8,00,000

Here the no. of years is taken based on each completed year. A has worked with the company for 20 years and 7 months, his period will be taken as 20, not 21.

Calculate your Gratuity Here!

Tax exemptions on Gratuity in 2023

Do you know there are Tax Exemptions on Gratuity? Yes, there are Exemptions. Calculate how much you are exempt from tax.

Government employees receiving Gratuity

In case an employee under the state government, central government, local authority or defense receives gratuity during death or retirement, it is fully exempt from tax.

Private employee receiving gratuity from an employer who is covered by the Payment of Gratuity Act

The least of this is exempt from tax

• Rs.20,00,000
• Gratuity received
• Salary last drawn × Number of completed years of services × 15/26

Private employee receiving gratuity from an employer who is not covered by the Payment of Gratuity Act

The least of this is exempt from tax

• Rs.10,00,000
• Gratuity received
• Last 10 months average salary × Number of completed years of services × ½

What if you are unable to complete five years of service due to death or disablement?

You will be given gratuity as if you have completed five years. You will be deemed to have completed five years but gratuity will be calculated on the number of years completed and not on five years. It is paid to you or your legal heir as the case may be, irrespective of the no. of years of continuous service. Gratuity received by the legal heir is exempt from tax.

How gratuity is calculated in case of death?

Do you know how is it calculated in case of death?

Here is the Gratuity amount based on the no. of years of service.

• Less than one year – 2 times the basic pay
• One year or more but less than 5 years – 6 times the basic pay
• 5years or more but less than 11 years – 12 times the basic pay
• 11years or more but less than 20 years – 20 times the basic pay
• 20 years or more – half the salary for every completed 6 monthly periods subject to a maximum of 33 times of salary.

When is gratuity not paid?

Are there cases in which gratuity will not be paid? Yes, see for what reasons.

• If you are fired for lawlessness or any other act of violence.
• If you include in an offense involving moral turpitude because of which you are fired.

What are the gratuity payment rules?

This can also be called the procedure for applying gratuity:

• Once you become eligible to receive gratuity, you can apply within 30 days from the date it becomes payable. If the date of retirement is known, even then you can apply before 30 days.
• No claim can be invalid because you have not applied within the period.
• An employer has to specify the amount, with the date of payment, within 15 days of receipt of the application.
• The payment has to be made within 30 days from the date of receipt of the application.
• In case the employer rejects the application, he has to specify the reason.
• The payment can be made in cash, or demand draft or cheque.
• If the claim is made to the legal heir or nominee, the employer may ask for a witness or evidence to ensure the genuineness of the claimant.
• You or the legal nominee can complain to the controlling authority (Assistant Labor Commissioner) in case of a dispute due to refusal of an application, or underpayment or failure to make the payment within the period.
• The gratuity is still payable even if the employer goes bankrupt and no court order can put a stay on it.

What forms are to be used in Gratuity?

This is the list of forms that are to be used in Gratuity:

1. Form I- Application for the payment of Gratuity
2. Form J- Application for the payment of Gratuity by Nominee
3. Form K- Application for the payment of Gratuity by Legal Heirs.
4. Form F- Nomination Form (To make a nomination)
5. Form G- To make a fresh nomination
6. Form H- Modification of the nominee
7. Form L- Issued by the employer to the employee stating the amount and date of payment.

8. Form M –Issued by the employer stating the reason for the rejection of gratuity
9. Form N- Application made to the labor commission by an employee
10. Form O- Issued by the authority to appear for case hearing
11. Form P- Summons issued by the authority to be present for the hearing
12. Form R- Issued by the authority directing to make gratuity payments

Employers have a right to forfeit gratuity

Did you know that your employer has a right to forfeit your gratuity?

There are two terms on which your employer can forfeit your gratuity. They are listed as follows:

If your services have been terminated for willful omission or negligence causing loss or damage to or destruction of property of the employer, then your gratuity shall be forfeited to the extent of loss or damage.

The gratuity can be wholly or partially forfeited:

• If you are terminated for your disorderly conduct or violence or;
• If you are terminated for an offense involving moral turpitude, in case it is committed during employment.

Conclusion

I hope you got a thorough knowledge of gratuity and understood that gratuity in itself is a benefit. You would now be knowing the eligibility, calculations, exemptions, the forms used and the conditions on which the employer forfeits gratuity. You can now apply these rules and find how much gratuity you are eligible for and also find what amount you are exempt from tax. It is in your hands to make a wise decision of investing this gratuity amount for your financial future.

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