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Gratuity: Calculation, Meaning, Eligibility, And More

· gratuity

Working individuals in India are acutely lucky to be getting several employee benefits during and after their service period. One such popular benefit is gratuity. Although it is one of the most well-known and beneficial benefits, a good number of employees do not have enough knowledge about it. If you are also one of them, you have surely landed at the right place.

In this blog, we will clear all your doubts regarding gratuity, from its meaning to the gratuity calculation formula.

Definition of Gratuity

It is basically an amount paid to employees after their employment period. This benefit is provided to employees for their utmost dedication as well as hard work that helped the organization to grow along the way. This payment is one of the many components that make up the gross salary of an employee.

How Gratuity Work?

Not every company in India pays the gratuity payment from their own account. Many businesses also rely on service providers who offer general gratuity insurance plans. If a firm goes for such service providers, it will have to pay the annual contributions to them, and in turn, they will pay the gratuity amount to your employees.

Need to mention that gratuity benefit is completely paid by employers and employees have no role here. They are just supposed to enjoy it and use it wisely at difficult times.

Eligibility Criteria of Gratuity

This benefit is not offered to every working individual who works with a company. Here are some of the conditions that make an employee eligible for this benefit:

  • S/he must be fit for superannuation
  • S/he must have worked for a period of five years with the same organization
  • S/he must have retired from the firm
  • If s/he meets with a serious accident or dies, then the nominee can request the amount and avail it on behalf of the employee.

How Gratuity is Calculated?

Every working individual should be well-versed with the gratuity calculation formula. Before discussing the whole process, it is important to note that gratuity is always calculated as 4.81 percent of Basic Pay.

Now, let’s quickly move forward and have a look at the simplest way to know your gratuity amount:

G= TY*WS*15/26

Here, TY stands for the total employment period, WS stands for last withdrawn salary (it will also include Dearness Allowances)

Employers can also pay their people more gratuity amounts; however, if gratuity laws are considered, the total amount cannot be more than INR 10,00,000. Anything more than this stipulated amount will be considered ex-gratia that is basically an optional contribution and not mandatorily imposed by any regulatory body.

Is it Taxable?

The taxation rules on this benefit are completely based on the sector a working individual works in.

  • The payment acquired by govt. employees are excused from the income tax
  • The payment received by employees working in private enterprises is also excused from tax but on a specified salary.

That's it, these are some crucial things to learn about gratuity.