GRATUITY

S U B M I T T E D B Y: A K H I R A J
WHAT IS
GRATUITY?
• Gratuity is a payment made by
the employer to an employee in
appreciation of the past
services rendered by the
employee.
• The retirement gratuity payable
is 16 times the basic pay subject
to maximum of Rs 20 lakh.
• Gratuity can either be received
by:
a. The employee himself at
the time of his retirement;
or
b. The legal heir on event of
the death of the
employee.
APPLICABILITY AND WHEN IS IT
PAYABLE
• The Payment of Gratuity Act, 1972 is applicable to employees engaged in factories, mines,
oilfields, plantations, ports, railway companies, shops, or other establishments with 10 or more
employees. Gratuity is fully paid by the employer. No part of the gratuity comes from an
employee’s salary.
• To be eligible for gratuity under the Gratuity Act, an employee needs to have at least five full
years of service with the current employer, except in the event that an employee passes away
or is rendered disabled due to accident or illness. In these cases, gratuity must be paid.
• Gratuity is paid when an employee:
i. Is eligible for superannuation
ii. Retires
iii. Resigns
iv. Passes away or is rendered disabled due to accident or illness (if an employee passes
away, gratuity will be paid to the employee’s nominee).
CALCULATION
OF GRATUITY
HOW GRATUITY IS CALCULATED
• The gratuity amount depends upon the tenure of service and last drawn salary. It is calculated
according to this formula: Last drawn salary (basic salary + dearness allowance) X number of
completed years of service X 15/26.

According to this formula, the time period of over six months or more is considered as one
year.

This means if you have completed five years and seven months of service, the number of years
would be considered as six years for calculation of gratuity benefit.

On the other hand, if the service period is five years and five months, for gratuity calculation it
will be considered five years.

An employer can however give higher gratuity than the amount under the prescribed formula.
EXAMPLE OF CALCULATION OF
GRATUITY FOR EMPLOYEES
COVERED UNDER THE ACT

Suppose A's last drawn basic pay is Rs 60,000 per month and he has worked with
XYZ Ltd for 20 years and 7 months. In this case, using the formula above, gratuity
will be calculated as:

Gratuity = (15 X 60,000 X 21)/26 = Rs. 7.26 lakh.

EXAMPLE OF CALCULATION OF
GRATUITY FOR EMPLOYEES NOT
COVERED UNDER THE ACT

Suppose A's last drawn basic pay is Rs 60,000 per month and he has worked with
XYZ Ltd for 20 years and 7 months. In this case, using the formula above, gratuity
will be calculated as:

Gratuity = (15 X 60,000 X 20)/30 = Rs. 6 lakh.

TAX TREATMENT OF GRATUITY
Gratuity is taxable when it is received under the head ‘Income from Salary’. An employee
can claim exemption maximum up to Rs. 20,00,000/-.
Any sum over and above the tax exempted gratuity amount will be taxed as per the
employee's applicable tax slab rate.
Tax treatment varies according to various categories of employees as follows:

Non Government Employee Non Government Employee

Government Employee
• Fully exempted from tax
covered under payment of
Gratuity Act 1972
• Maximum exemption from
tax - least of the following:
• Actual gratuity received
• Rs. 20,00,000/-
• No. of completed years of
service or part thereof in
excess of 6 months * 15/26
* last salary drawn (i.e.,
eligible gratuity amount).
not covered under payment
of Gratuity Act 1972
• Maximum exemption from
tax – least of the following:
• Actual gratuity received
• Rs. 20,00,000/-
• ½ * average salary *
completed year of
service(part of the month
not considered) (i.e.,
eligible gratuity amount).
RECOVERY OF GRATUITY
• If the employer fails to pay the gratuity within the prescribed time( i.e., within
30 days of termination of employment), the controlling authority is empowered
to issue a certificate to the collector to recover the amount of gratuity.
• The employer shall also be liable to pay compound interest at such rate as may
be notified by Central Government from time to time.
• The interest shall be paid from the date of expiry of the prescribed period and
ending with actual date of payment of gratuity.
• The interest payable shall not exceed the amount of gratuity payable.
PENALTIES

Offence Penalty

• False Statement to CALCULATION

• 6 months
avoid payment. imprisonment or Rs.
• Default in complying OF GRATUITY
10,000 or both.
with act. • 3 months- 1 year
• Non payment of imprisonment or
gratuity. Rs.20,000 or both.
• 6 months- 2 years
imprisonment
Slide title 29

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