Gratuity – New Limit, Eligibility, Formula, Taxation and Calculator

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The Parliament passed the Payment of Gratuity (Amendment) Bill. This will increase the limit amount to Rs.20 Lakh from the existing Rs.10 Lakh. This is applicable for central govt employees and also private sector employees (organized sectors).

Considering this new Payment of Gratuity (Amendment) Bill, let us see the new rules, eligibility, the formula to calculate, taxation and also the calculator.

Gratuity is nothing but a favorable BONUS given to you by your employer for being loyal to them as an employee for long. Gratuity is a defined benefit plan offered by your employer.

It is a payment made to an employee by the employer either at the time of retirement or when he is leaving the job. It is given to the employee once he has completed at least 5 years of continuous service.

It is mandatory for any employer in the private sector or public sector who has 10 or more employees to pay gratuity to all employees.

Who is eligible for Gratuity?

If your company’s employee strength is more than 10 and if you completed a minimum of 5 years of continues service, then you are eligible for Gratuity. Do remember that once employee strength reached to 10 or more, then even though the strength reduced later, you are still eligible for Gratuity.

Temporary staff, contract workers etc., are also eligible for the gratuity amount, as long as they are considered as employees of the organization. However, apprentices are not eligible for Gratuity.

If an employee is transferred overseas on an assignment, then he is still eligible for Gratuity as he is on the rolls of the company.

Probation period can be considered in determining the number of years of service.

It will be payable to you at the time of-

Retirement.
Resignation or Termination.
On death or Disablement due to accident or disease.
On Retrenchment Layoff.
VRS.

What is the meaning of 5 years of continues service under Gratuity?

As per the Payment of Gratuity Act 1972, a period of uninterrupted service including service which may be interrupted on account of the following-

# Sickness,

# Accident,

# Leave,

# Layoff,

# Strike,

# Lockout,

# Cessation of work not due to any fault of the employees and

# Absence from duty without leave(not being absence in respect of which an order treating the actions as break in service has been passed in accordance with d standing orders, rules or regulations governing the employees of the establishment).

How is the 5 years service calculated in Gratuity?

If an employee works below the ground (like mine), every year in which the employee works for more than 190 days in a year, is considered as 1 year. If the employee works above the ground, 240 working days in a year is taken as 1 year for gratuity calculation.

Hence, if the number of days worked in a year is less than the above-said working days, then such a year is ignored for Gratuity calculation.

For example, if an employee worked for 4 years and 8 months, the duration is considered as 5 years of continues service and he is eligible for gratuity.

However, if the employee has worked for 4 years and 4 months, it is treated as less than 5 years and no gratuity will be payable to an employee.

When are the 5 years of continued service not applicable in Gratuity?

The condition of 5 years of continuous service is not applicable if employee’s service is terminated due to DEATH OR DISABLEMENT. Your nominee or legal heir can receive your gratuity amount (in the event of the death of the employee).

What is the new limit under Gratuity (As per Payment of Gratuity (Amendment) Bill 2017)?

Earlier the maximum limit employee can receive under Gratuity was Rs.10 lakh. However, now it is enhanced to Rs.20 lakh.

However, if your employer ready to pay more than this, then they can do so. But such amount which is more than Rs.20 lakh Gratuity will be taxable income for you.

The ceiling of Rs.20 lakh applies to the aggregate of gratuity received from one or more employers in the same or different years.

Note:-The effective date of this new Gratuity limit is 29th March 2018. Refer the notification for the same.

How to calculate Gratuity Amount?

In order to calculate the Gratuity amount, first, you have to check it whether you are covered under the Gratuity Act or not. Based on that the calculation can be done.

# Calculate Gratuity Amount (covered by the Payment of Gratuity Act, 1972)

Definition of Salary for the purpose of calculation of Gratuity is Basic+DA only (Salary definition for calculation of Gratuity, HRA, EPF and Leave Encashment). You must not include any other salary components for this purpose. The formula to calculate Gratuity is as below.

Gratuity = Last drawn salary * 15/26 * No. of completed years of service.

Completed years of service-Suppose if your service is more than 6 months in a year, then such year is considered as a year for calculation. However, if it is less than 6 months, then you have to ignore that year for calculation.

For example, if your service is 6 years 4 months, then the completed years of service will be 6 years only. However, if your service is 6 years 7 months, then the completed years of service will be 7 years.

You have to ignore the weeks and days for this calculation. Also, you must be worked for more than 6 months in a year i.e 6 months one day or more.

# Calculate Gratuity Amount (Not covered by the Payment of Gratuity Act, 1972)

Definition of Salary for the purpose of calculation of Gratuity is Basic salary, Dearness Allowance (DA) and Commission (if paid as a % of turnover) (Salary definition for calculation of Gratuity, HRA, EPF and Leave Encashment). You must not include any other salary components for this purpose. The formula to calculate Gratuity is as below.

Gratuity = Average salary * ½ * No. of years of service

Average Salary-Average of last 10 months salary (Basic + DA + Commission) preceding the month of your retirement/resignation.

No. of years of service-The completed years only considered as your service years. For example, if you completed 6 years and 8 months, then you have to consider only 6 years and exclude 8 months. Same way, if you completed 6 years and 4 months, then also you have to consider only 6 years and exclude 8 months for calculation.

Tax Benefits of Gratuity

Any gratuity amount received by an employee (Govt or Private employee) during his service is taxable.

However, when gratuity is received by the employee at the time of his retirement, death or superannuation then tax exemption rules for government employees differs from private employees. Refer the below points for the same purpose.

# Tax Benefits of Gratuity for Central and State Govt. employees, Defense employees, and employees in Local authority

Any Gratuity received by Central and State Government employees, defense employees and employes in local authority during death or retirement is completely tax-free.

# Tax Benefits of Gratuity for private sector who are covered under Payment of Gratuity Act 1972

Tax Benefits of Gratuity for private sector employees who are covered under the Payment of Gratuity Act 1972 is exempted up to the least of the following-

Rs 20,00,000
Actual Gratuity received
Last drawn salary*15/26*Number of years of service

# Tax Benefits of Gratuity for private sector who are NOT covered under Payment of Gratuity Act 1972

Tax Benefits of Gratuity for private sector employees who are NOT covered under the Payment of Gratuity Act 1972 is exempted up to the least of the following-

Rs 20,00,000
Actual Gratuity received
Average salary * (1/2*Number of years of service)

As I said above the ceiling of Rs.20 lakh applies to the aggregate of gratuity received from one or more employers in the same or different years.

Take an example that Mr.X worked in an organization ABC for 6 years and received Rs.10 lakh as Gratuity. He claimed that for tax benefits and this amount is fully tax-exempt.

After leaving the organization ABC he joined the organization XYZ. Here he worked for 11 years and received the Gratuity amount of Rs.20 lakh.

As he already availed the exemption of Rs.6 lakh from the Gratuity received from the organization ABC, this time he can avail the maximum tax exemption of another Rs.14 lakh only (Rs.20 lakh-Rs.6 lakh). The remaining Rs.6 lakh gratuity which he received from the organization XYZ will be taxable income for him.

Such income should be considered as an income under the head of SALARY. This is applicable for both Government as well as Private employees.

# Tax Benefits of Gratuity for the widow or legal heirs of employee (in case of the death of an employee)

Any gratuity received by employee’s widow or legal heirs is completely tax-free in their hands.

If the gratuity becomes due/sanctioned after the death of the employee. If the gratuity amount becomes due and paid before the death of the employee then it is taxable under the head ‘Income from Other Sources.’ The nominee / legal heir has to show it in ITR (Income Tax Returns).

When are you eligible to receive the Gratuity?

Once an employee becomes eligible to receive a gratuity, he can apply within 30 days from the date it becomes payable. However, if you are retiring from a job which is known to you earlier, then such form is to be given 30 days before such date. You have to use the Form I for this purpose.

Any Form For Claiming Gratuity Submitted After Due Dates Specified Above Can Be Accepted If Employee Give Adequate Reason For Delay.

In case of the death of an employee, the nominee can apply for gratuity in Form J within 30 days of being payable.

In case of the death of an employee, and there is no mination to gratuity, then legal heir may apply in Form H within 30 Days of being payable.

Gratuity has to be paid within 30 days from the date it is payable to the person. If it is not paid within 30 days, the company has to pay simple interest from the date of eligibility till the date of actual payment.

The nomination under the Gratuity

Once you have completed one year of service, then you have to make a nomination within 30 days from the date of completion of one year service.

If an employee has a family at the time of making a nomination, the nomination shall be made in favor of one or more members of his family, and any nomination made by such employee in favor of a person who is not a member of his family shall be void.

If at the time of making a nomination the employee has no family, the nomination may be made in favor of any person or persons but if the employee subsequently acquires a family, such nomination shall forthwith become invalid. In such a situation employee has to nominate his family member or members.

Every nomination, fresh nomination or alteration of nomination, as the case may be, shall be sent by the employee to his employer, who shall keep the same in his safe custody.

In case of death of the nominee before the death of the employee, the interest of the nominee shall revert to the employee. The employee, in such cases, shall make a fresh nomination in respect of such interest.

You can use the Form F to nominate under the Gratuity.

Online Gratuity Calculator

There are many online calculators and also the excel sheets available for you all. However, I refer the Gratuity Calculator which is available on Income Tax Department website. Refer the below link for the same.

ONLINE Gratuity Calculator

Forfeiture of gratuity

If an employee’s services are terminated due to any act, willful omission or negligence causing damage or loss to or destruction of property of the employer, the employee’s gratuity shall be forfeited to the extent of damage or loss.

The full amount of gratuity can be forfeited if an employee’s services have been terminated due to:
a) His riotous or disorderly conduct or any other violent act;
b) Committing an offense involving moral turpitude.

No court decree or court order can attach the amount payable under the Gratuity Act. This means that your gratuity will be still payable to you even if your employer goes bankrupt. No court order can stay this.

List of forms used for Gratuity

Form I-Application for the payment of Gratuity

Form J-Application for the payment of Gratuity by NOMINEE

Form K-Application for the payment of Gratuity by LEGAL HEIRS.

Form F-Nomination Form

Form G-To make a fresh nomination

Form H-Modification of the nominee

Form L-Issued by the employer to the employee stating amount and date of payment.

Form M-Issued by employer stating reasons for rejection.

Hope this much information is sufficient to understand the “Gratuity – New Limit, Eligibility, Formula, Taxation and Calculator”. Let me know if you have any doubts.

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