Gratuity Rules in India are very clear. It states that every employee is eligible to get an ex- Gratia amount after leaving the job. But this retirement benefit is subject to some conditions. The gratuity rules are applicable for government employees and private sector. Gratuity is tax-free if it is given according to the specified formula.
What is Gratuity
A Gratuity is a lump sum payment given by the employer. It is a mark of recognition to the employee’s service. An employee gets gratuity at the time of retirement or leaving the job. It is a ‘defined benefit’ plan.
You can know your gratuity amount in advance. The amount of gratuity depends only upon the tenure of service and last drawn salary. But there are many rules of gratuity an you must learn about them.
Every employer is bound to give gratuity amount to its employees if it employs more than 10 people. But you would get the gratuity only after completing 5 years in the service. There many more rules of gratuity. Let us understand them one by one.
5 Years Continuous Service
To be eligible for gratuity, you must complete 5 years continuous service. At the time of years calculation, the duration is rounded to the nearest complete years. So, if you have worked for 4 years and 7 months, it would be considered as the 5 years and you would become eligible for gratuity.
Continuous service means uninterrupted service. But, it does include the interruption due to, leave, sickness or accident. The strike, lay-off, or a lockout is also not considered as an interruption. Indeed, any interruption which is not due to the fault of the employee, would not be counted. But, if you have taken a sabbatical or leave without pay, then your service would get interrupted.
Gratuity Only After Leaving Job
An employee is entitled to get gratuity only after the termination of employment. This termination may be of retirement, resignation or job switch. So, It is clear, you are not going to get gratuity while in the job.
Death or Disablement Relaxation
The minimum 5-year service rule is not applicable in case of death or disablement. The gratuity amount would be given to the nominee or legal heirs.
Gratuity is Non-Taxable
Gratuity amount is totally tax-free. However, it should be given according to the prescribed gratuity formula.
Employer Can give Excess Gratuity
An employer can give gratuity more than the prescribed formula. But the excess gratuity would be subject to tax.
The gratuity amount is free from tax but this is subject to a maximum limit. If you get gratuity more than the limit, the excess amount woule be taxable. The Government has recently increased the gratuity limit to 20 lakhs. Earlier it was 10 lakhs.
Gratuity Rules Applicable If Employees Are More Than 10
Every factory or establishment would pay gratuity to its employees. The gratuity rules are not mandatory for the factory or establishment which employs less than 10 persons. The number of employees would be counted as the average of last 12 months.
Protected Against Liabilities
No court can attach gratuity amount. Whether there is a decree against the employee from a civil or criminal court.
Forfeiture Of Gratuity If There is Damage
An employer can forfeit gratuity if an employee makes a loss to the company. The forfeiture would be to compensate the loss. However, the employer must terminate the services of the employee because of this damage.
There is a gratuity formula for the payment. According to this formula, 15 days salary is given for every completed year. Since the number of days in the month is considered only 26, you will get 15/26 of your one-month salary for every completed year.
This formula is dependent upon these two variables.
The salary includes basic pay, dearness allowances and commission. The last drawn salary is considered for gratuity calculation. If, the employee is a daily wage earner, the average of last 3-month wage is considered as one-day salary.
The continuous duration of service. More than 6-month service in a year is calculated as one year.
The Gratuity Formula
Gratuity Amount = Salary x Tenure x 15/26
For every year, you will get 57.69% of monthly salary as gratuity. Note, the monthly salary would be last drawn salary and it includes only Basic+DA+commission. To know the exact amount of your gratuity you can use the gratuity calculator.
Also Read – The Salary You Always Remember But Never Get
There is a limit of gratuity exemption from tax. Gratuity of more than 10 lakhs would be liable to the tax. The employee must pay the tax on the gratuity over and above the Rs 10,00,000. Earlier this limit was only 3.5 lakhs.
I have tried to share the knowledge of gratuity, in a nutshell. You can also read the whole gratuity act for better understanding of gratuity rules and minute details.