Gratuity Calculator

What is Gratuity?

Gratuity is a monetary benefit given by an employer to an employee as a token of appreciation for the services rendered during employment. It is governed by the Payment of Gratuity Act, 1972 in India. Gratuity is payable when an employee completes at least 5 continuous years of service with the same employer. It is paid at the time of retirement, resignation, superannuation or death or disablement due to accident or disease.

Gratuity Eligibility

An employee is eligible for gratuity if they have completed a minimum of 5 years of continuous service with the employer. However, in case of death or disablement, the 5-year condition is waived and gratuity is payable even for shorter service periods. The Act applies to establishments employing 10 or more employees on any day in the preceding 12 months.

Gratuity Formula

For employees covered under the Payment of Gratuity Act, the formula is: Gratuity = (15 x Last Drawn Salary x Years of Service) / 26. Here, "Last Drawn Salary" includes Basic Salary plus Dearness Allowance (DA). The number 15 represents 15 days of wages, and 26 represents the number of working days in a month. If the years of service include a fraction of 6 months or more, it is rounded up to the next full year.

Tax Exemption on Gratuity

Gratuity received by government employees is fully exempt from income tax. For private sector employees covered under the Act, the least of the following is exempt: (1) Rs. 20,00,000 (the maximum limit), (2) Actual gratuity received, or (3) 15 days salary for each completed year of service (calculated as per the formula). Any amount exceeding the exempt limit is taxable as income from salary.

Frequently Asked Questions

Is gratuity mandatory for all employers?

Gratuity is mandatory for employers with 10 or more employees under the Payment of Gratuity Act, 1972. Once the Act becomes applicable to an establishment, it continues to apply even if the number of employees falls below 10.

What if I leave before completing 5 years?

If you leave the organization before completing 5 years of continuous service, you are generally not entitled to gratuity under the Act. However, some employers may offer gratuity voluntarily for shorter service periods as per their company policy.

Is the maximum gratuity limit of Rs. 20 lakh applicable to all?

The Rs. 20 lakh cap is the maximum tax-free limit for gratuity as per the current rules. An employer can pay more than this amount, but the excess over Rs. 20 lakh will be taxable in the hands of the employee.