Gratuity: How To Calculate, Rules, Eligibility and Formula

Gratuity is a benefit received by an employee for services rendered to an organisation.

Gratuity is a benefit received by an employee for services rendered to an organisation. For companies covered under the Gratuity Act, this benefit is paid when an employee completes five or more years of service with the employer. An employee gets gratuity when he/she resigns, retires or is laid off. In case of death or disablement there is no minimum eligibility period.

(Also Read: Decoding The Gratuity Bill - Who Benefits, Income Tax Implications And Other Details)

How Gratuity is Calculate
The gratuity amount depends upon the tenure of service and last drawn salary. It is calculated according to this formula: Last drawn salary (basic salary plus dearness allowance) X number of completed years of service X 15/26.

According to this formula, the time period of over six months or more is considered as one year.

This means if you have completed five years and seven months of service, the number of years would be considered as six years for calculation of gratuity benefit.

On the other hand, if the service period is five years and five months, for gratuity calculation it will be considered five years.

An employer can however give higher gratuity than the amount under the prescribed formula.

Maximum Amount

For government employees, Rs 20 lakh is the maximum amount that can be paid as gratuity. The Seventh Pay Commission had recommended increase in the gratuity ceiling to Rs 20 lakh from the earlier level of Rs 10 lakh.

Income Tax Treatment of Gratuity
For government employees, entire amount of gratuity received on retirement or death is currently exempted from income tax.

In case of non-government employees, income tax rules on gratuity are applicable depending on whether employees are covered under the Payment of Gratuity Act, 1972 or not.

For non-government employees covered under the Gratuity Act, the income tax exemption on any gratuity received is least of the following:

Maximum amount specified by the government which is currently Rs 10 lakh
Last drawn salary X 15/26 X years of service
Actual gratuity received

For non-government employees not covered under the Payment of Gratuity Act

Half month's average salary for each completed year of service
Maximum amount specified by the government which is currently Rs 10 lakh
Actual gratuity received

(Average monthly salary is to be computed on the basis of average of salary for 10 months immediately preceding the month (not the day) of retirement)