Gratuity Calculator
Calculate gratuity amount & tax exemption under the Payment of Gratuity Act.
Gratuity Calculator
Gratuity Breakdown
Tax Exemption Breakdown
Gratuity Calculator India
Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for long and meritorious service. It is a statutory right under the Payment of Gratuity Act, 1972, and is one of the key components of an employee's retirement benefits. Understanding how gratuity is calculated and its tax implications is essential for financial planning, whether you are switching jobs or retiring.
What is Gratuity?
Gratuity is a monetary benefit paid by an employer to an employee who has rendered continuous service for at least five years. It is essentially a reward for loyalty and long-term commitment to the organization. The Payment of Gratuity Act, 1972, mandates this benefit for establishments employing 10 or more persons. The amount is paid at the time of retirement, resignation, superannuation, death, or disablement. Unlike provident fund or pension, gratuity is a one-time payment and does not involve any employee contribution — it is entirely funded by the employer.
Many employers also offer gratuity amounts higher than the statutory minimum as part of their employee welfare policies. The gratuity amount can be a significant sum, especially for employees with long tenures, making it an important part of retirement planning and financial security.
Gratuity Formula Explained
The formula for calculating gratuity depends on whether the employee is covered under the Payment of Gratuity Act, 1972:
If covered under the Act: Gratuity = (Basic Salary + Dearness Allowance) × 15/26 × Number of Years of Service. Here, 15 represents 15 days of salary (half a month), and 26 represents the number of working days in a month as per the Act. This formula effectively calculates half a month's salary for each completed year of service based on a 26-day work month.
If not covered under the Act: Gratuity = (Basic Salary + Dearness Allowance) × 15/30 × Number of Years of Service. In this case, 30 days is used instead of 26, as there is no statutory mandate on working days. This formula generally yields a slightly lower gratuity amount compared to the Act-covered formula.
The key difference lies in the divisor: 26 (for covered employees) vs 30 (for non-covered employees). For example, with a Basic + DA of ₹60,000 and 10 years of service, a covered employee would receive ₹3,46,154 while a non-covered employee would receive ₹3,00,000.
Gratuity Eligibility
To be eligible for gratuity under the Payment of Gratuity Act, an employee must have completed at least 5 years of continuous service with the same employer. However, there are important exceptions to this rule. The 5-year requirement is waived in case of death or disablement of the employee. In such cases, gratuity is paid to the nominee or legal heir regardless of the length of service.
Continuous service means uninterrupted service and includes periods of leave, lay-off, strike (not illegal), and lock-out. If an employee has completed 4 years and 240 days of service in the fifth year, it is considered as 5 years of continuous service for gratuity purposes. Seasonal establishments have different rules where 60 days of work in a season counts as one year of service.
The Act applies to factories, mines, oilfields, plantations, ports, railway companies, shops, and establishments with 10 or more employees. Government employees are also entitled to gratuity under their respective service rules.
Tax on Gratuity
Under Section 10(10) of the Income Tax Act, 1961, gratuity received by an employee is exempt from tax to a certain extent. The tax exemption is calculated as the minimum of three amounts: (1) Actual gratuity received, (2) ₹20,00,000 (₹20 lakh), which is the statutory limit, and (3) 15 days' salary (based on the last drawn salary) for each completed year of service. Any amount exceeding the exempt limit is added to the employee's income and taxed as per the applicable income tax slab.
The ₹20 lakh limit was increased from ₹10 lakh in 2016 by the government. For government employees, the entire gratuity amount is fully exempt from tax. The exempt portion of gratuity is not included in the gross total income, and no deduction under Section 80C or any other section is available on it.
It is important to note that if an employee has already claimed gratuity exemption in a previous employment, the ₹20 lakh limit is reduced by the amount already claimed. This ensures that the cumulative exemption across all employments does not exceed ₹20 lakh.
When is Gratuity Forfeited?
An employer has the right to forfeit gratuity, either partially or fully, under certain circumstances as specified in Section 4(6) of the Payment of Gratuity Act. Gratuity can be forfeited if the employee's services have been terminated for any act, wilful omission, or negligence causing damage or loss to the employer's property. In such cases, the gratuity can be forfeited to the extent of the damage caused.
Additionally, gratuity can be fully forfeited if the employee's services have been terminated for riotous or disorderly conduct, or for any act of violence, or for any offence involving moral turpitude committed during the course of employment. However, the employer cannot forfeit gratuity merely because the employee has resigned or been terminated without cause. The forfeiture provision is specifically designed for cases involving misconduct or proven negligence.
If an employee believes that gratuity has been wrongfully withheld or forfeited, they can file a complaint with the Controlling Authority (usually the Labour Commissioner) who will adjudicate the dispute. The employer must pay the gratuity within 30 days of it becoming payable; failure to do so attracts interest at the rate notified by the government.