What is Gratuity under the Payment of Gratuity Act 1972?

Gratuity is a monetary retirement benefit paid by an employer to an employee in recognition of long-term continuous service. Under the Payment of Gratuity Act 1972, any establishment with 10 or more employees is legally required to pay gratuity to employees who have completed at least 5 years of continuous service.

What is the formula for calculating Gratuity?

For employees covered under the Gratuity Act: Gratuity = (15 × Last Drawn Basic Salary + DA × Number of Completed Years of Service) / 26, where 15 represents 15 working days and 26 represents total working days in a month.

What is the maximum tax-free gratuity limit in India?

Under Section 10(10) of the Indian Income Tax Act, the maximum statutory tax-free gratuity limit for private sector employees is ₹20 Lakh (enhanced from ₹10 Lakh). For government employees, gratuity is 100% tax-exempt without any upper monetary ceiling.

Is the 5-year continuous service rule mandatory in case of death or disability?

No. The mandatory 5-year continuous service condition is relaxed in unfortunate cases of death or permanent disability of the employee. In such cases, full gratuity is paid to the nominee/legal heirs regardless of tenure.

How is fractional service tenure rounded in gratuity calculations?

If the fractional service period in the final year exceeds 6 months (e.g. 7 years and 7 months), it is rounded UP to the next full year (8 years). If it is 6 months or less (e.g. 7 years and 4 months), it is rounded DOWN to 7 years.

Gratuity Calculator Online – Calculate Employee Gratuity Amount (Payment of Gratuity Act 1972)

What is Employee Gratuity?

Gratuity is a defined benefit statutory financial component paid by an employer to an employee as a token of appreciation for rendering continuous, long-term service to the organization. Governed under the Payment of Gratuity Act, 1972, it applies to all factories, mines, oilfields, plantations, ports, railway companies, shops, and commercial establishments employing 10 or more persons on any day of the preceding 12 months.

The 15/26 Statutory Gratuity Formula

Under the Gratuity Act, a working month is legally considered to consist of 26 working days (excluding 4 Sundays), and gratuity is calculated at the rate of 15 days' salary for every completed year of service:

Statutory Gratuity Equation

\text{Gratuity} = \frac{15 \times \text{Last Drawn Basic Salary + DA} \times \text{Years of Service}}{26}

Practical Calculation Example:

Suppose an employee resigns after 10 years of service with a last drawn Basic Salary + Dearness Allowance of ₹60,000 per month:

Formula: $\text{Gratuity} = \frac{15 \times 60,000 \times 10}{26}$
Calculation: $\frac{90,00,000}{26} = \mathbf{₹3,46,154}$

Frequently Asked Questions (FAQs)

Is Gratuity paid if an employee resigns voluntarily?

Yes! Whether an employee resigns voluntarily, takes retirement, is retrenched, or switches to another company, gratuity is 100% payable provided they have completed at least 5 years of continuous service with that employer.

What is the ₹20 Lakh tax exemption limit under Section 10(10)?

Gratuity received by private sector employees covered under the Act is exempt from income tax up to a lifetime ceiling of ₹20,00,000. Any amount received in excess of ₹20 Lakh is treated as taxable salary income.

Can an employer forfeit an employee's gratuity?

An employer can forfeit gratuity only if the employee's services have been terminated for riotous or disorderly conduct, acts of violence, moral turpitude, or proven financial damage caused to the company's property (and only to the extent of the quantified damage).

Within how many days must an employer pay the gratuity amount?

Under Section 7(3) of the Act, the employer must disburse the gratuity amount within 30 days from the date it becomes payable. If not paid within 30 days, the employer is liable to pay simple interest on the delayed amount at government-notified rates.

Does HRA or Special Allowance count in Gratuity calculation?

No. Only Basic Salary + Dearness Allowance (DA) is considered for gratuity calculation. Allowances like HRA, Special Allowance, LTA, and Performance Bonuses are excluded.

Gratuity Calculator – Calculate Employee Gratuity Payout

What is Employee Gratuity?

The 15/26 Statutory Gratuity Formula

Practical Calculation Example:

Frequently Asked Questions (FAQs)

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