What is Gratuity Entitlement in India?
Gratuity is a statutory benefit provided to employees in India under the Payment of Gratuity Act, 1972. It is a financial reward given by an employer to an employee as a token of appreciation for their continuous service. The gratuity amount is payable upon resignation, retirement, termination, or in cases of death or disability.
Employees working in establishments with 10 or more employees are eligible for gratuity after completing a minimum of five years of continuous service. However, in the case of death or disability, gratuity is payable regardless of the service period. The amount is calculated based on the last drawn salary and the number of years worked, using the formula defined under the law.
Gratuity Calculation Formula in India
Several factors influence the gratuity amount in India, including:
- 1. Length of Service – Employees must complete at least five years of continuous service unless terminated due to death or disability.
- 2. Last Drawn Salary – Gratuity is calculated based on the basic salary and dearness allowance (DA) at exit time.
- 3. Type of Separation – The payout varies depending on whether the employee retires, resigns, or is terminated.
- 4. Employer Type – The formula differs based on whether the employer is covered under the Payment of Gratuity Act or not.
- 5. Taxation Rules – Government employees receive full tax exemption, while non-government employees have tax exemptions up to ₹20 lakh.
Your Questions Answered
Who is eligible for gratuity in India?
Employees working in an organization with 10 or more employees are eligible for gratuity after completing five years of continuous service. In cases of death or disability, the five-year rule does not apply.
How is gratuity calculated?
Gratuity is calculated based on the employee’s last drawn basic salary + DA and the number of years of service. The standard formula considers 15 days of salary per year of service, with the number of working days assumed as 26 for covered employers and 30 for non-covered employers.
Is gratuity taxable in India?
- Government Employees: Gratuity is fully exempt from tax.
- Private Sector Employees:
- Covered under the Act: The least of the following three amounts is tax-exempt:
- ₹20 lakh (as per the latest exemption limit).
- Actual gratuity received.
- The gratuity amount is calculated using the standard formula.
- Not covered under the Act: The least of the following is tax-exempt:
- ₹20 lakh.
- Half a month’s average salary per year of service.
- Actual gratuity received.
When is gratuity paid to an employee?
Gratuity is paid within 30 days from the date of an employee’s resignation, retirement, or termination. Any delay in payment attracts interest as per the Act.
Can gratuity be forfeited?
Yes. Gratuity can be partially or fully forfeited if an employee is terminated for misconduct, moral turpitude, or willful damage to the employer’s property.
Does the type of employment contract affect gratuity?
No. The Payment of Gratuity Act, 1972, applies to permanent employees regardless of whether they are on a fixed-term or indefinite contract.
How is gratuity paid in case of an employee’s death?
If an employee passes away, gratuity is paid to their nominee or legal heir, and the five-year minimum service rule is waived.
What is the maximum gratuity payable under the law?
The maximum gratuity payout is ₹20 lakh. Any amount beyond this is considered ex-gratia and taxable.
What is 15 and 26 in gratuity calculation?
In gratuity calculations, the fraction 15/26 determines the end-of-service benefit based on the employee’s last drawn salary. This ratio comes from the Payment of Gratuity Act 1972, which states that gratuity should be calculated as 15 days of wages for each completed year of service. Since a standard working month is considered to have 26 working days (excluding 4 Sundays), the formula divides the total by 26 to ensure an accurate prorated calculation. This method ensures that gratuity is fairly distributed based on actual working days rather than assuming a full 30-day month.
Disclaimer
This gratuity calculator estimates an employee’s gratuity amount based on the Payment of Gratuity Act, 1972. It does not account for additional benefits like leave encashment or allowances. The actual gratuity payout may vary based on individual employment contracts and the latest government regulations.
Qureos is not liable for any inaccuracies; this tool is for guidance only and should not be used as a substitute for professional legal or financial advice.
