Gratuity payment: Who gets it and how much?

Some good news for government employees! The central government has increased the limit of gratuity for its employees from 20 lakh rupees to 25 lakh rupees. This order came into effect from January 1, 2024. What is gratuity? What are the gratuity provisions available for employees in the private sector? How is the amount of gratuity determined? When is tax applicable on gratuity? Let’s understand.

First, let’s understand what gratuity is? Gratuity is a reward given by the employer, i.e., the company, as a token of loyalty to the employee. When employees completes five years of continuous service in an organization, they become eligible for gratuity. The ‘Payment of Gratuity Act’ was enacted in 1972 to protect the interests of employees. Any organization where 10 or more employees have worked during the last 12 months will come under the purview of the Gratuity Act.

This benefit is separate from salary, provident fund, and pension. Gratuity is usually received at the time of retirement. But if an employee leaves or changes jobs after five years, they will receive gratuity. If an employee dies during employment or becomes disabled, gratuity will be paid even if the service is less than five years. This reward helps employees stay connected to the company for a longer period. Gratuity is not payable for less than five years of service.

How much gratuity will an employee receive depends on their basic monthly salary and the duration of their employment. According to the rules, payment is made based on 15 days of basic salary for each year of service. The calculation for a year is based on 26 days excluding four days of leave per month. The total gratuity is calculated using the following formula:

Total Gratuity = Last Basic Salary x (15/26) x Years of Service

For example, if an employee has worked for 10 years in ABC company and their basic salary is 40,000 rupees, then their gratuity will be 40,000 x  (15/26)  x 10= 2,30,769.

The calculation of years of service is rounded to the nearest figure. Under the new rules, the maximum limit of gratuity for central government employees is 25 lakh rupees, and for the private sector, it is 20 lakh rupees. If desired, an organization can offer more gratuity than the prescribed rules.

According to the rules, the gratuity amount must be paid within 30 days of leaving the job. If the company is not providing gratuity or not paying the gratuity amount on time, you can complain to the regional labour commissioner (DLC). If the complaint is found valid, the company will have to pay the gratuity amount along with the interest prescribed by the central government. The interest calculation will be from the due date to the payment date.

Now the question arises, what are the provisions regarding tax on the gratuity amount? The gratuity amount received under the rules is tax-free. If any organization provides gratuity beyond the prescribed limit, the amount above the set limit will be considered as the employee’s income and taxed accordingly.

If you are working in a private company, understand the rules of gratuity well. Many times, the company refuses to give gratuity. Employees are also misled about this. If you are leaving your job or retiring, calculate the gratuity yourself. If this amount does not match the company’s calculation, file your complaint. If there is a delay of more than 30 days in the payment of gratuity, demand interest from the company.