Gratuity – Calculation – Formula – Rules – Gratuity Meaning – Eligibility – Taxability

Gratuity – Gratuity Calculation – Gratuity Formula – Gratuity Rules – Gratuity Meaning – Gratuity Eligibility – Gratuity Taxability Gratuity definition:

Gratuity is the additional salary that given to an employee by the employer for the services offered to the company. In other words, an employee gets an extra salary for the services he offered to the company. This extra salary is given to the employee by the employer. Although there is a certain criterion for offering Gratuity, one must know what Gratuity Act is.

Gratuity - Gratuity calculation - Gratuity meaning
Gratuity – Gratuity calculation – Gratuity meaning

Gratuity meaning – Gratuity definition:

Gratuity Act says that the employer will give additional salary to an employee for the services he offered over the years. This additional salary or Gratuity gave only when an employee is either gets retired or resign from the job. If one is eligible for Gratuity, then he should get Gratuity if the company comes under Gratuity Act.

  • Gratuity meaning in Hindi: ऐच्छिक दान
  • Gratuity meaning in Tamil: பணிக்கொடை
  • Gratuity meaning in Telugu: పారితోషికం
  • Gratuity meaning in Marathi: ग्रॅच्युइटी

Gratuity Eligibility

Gratuity is not something which can be given to anyone but, only to those who are eligible for it. There is a short Gratuity eligibility criterion which one should pass to apply for Gratuity. These are the things which needed for being eligible for Gratuity.

  • The company or shop for which you work should come under Gratuity Act. Otherwise, you will not be able to get Gratuity.
  • You must have worked under the company or shop for a minimum of 5 years continuously. Moreover, a minimum of 240 days a year is also necessary to be eligible for Gratuity.

If you pass in both these things then, can apply for Gratuity at the time of your retirement or at the time you resign. Keep in mind that if you do not pass any one of the rules above then, you will not give a gratuity.

Gratuity Calculation

There is a simple formula for calculating Gratuity amount. The Gratuity formula goes as follows.

Gratuity Formula = Salary x Tenure x 15/26

The above Gratuity formula is used to calculate Gratuity amount for any employee. The salary under this formula includes basic pay, commissions and dearness allowances. The tenure is the amount of time or years an employee has provided service to the company. The tenure should be continuous because otherwise, the Gratuity will not be liable. Moreover, the service of more than six continuous months considered as a complete year.

Gratuity Formula

Finally, at the end of every year, an employee is given 15 days of salary. So an employee gets 15/26 of one month’s salary for a completed year as a month considered of only 26 days. This is how Gratuity formula works.

Gratuity Taxability

As mentioned above, Gratuity is free of tax to Government employees, retired employee, and former employees. Apart from these, all other types of companies or employees are taxable under Gratuity Act.

For the rest of the employees, the Gratuity amount is calculated by the Gratuity formula only.

How is gratuity calculated?

Let’s take an example that there is an employee named A, who worked for a company for 19 years and two months. The tenure will be rounded off, and that will make A’s total years of services as 19 years. Now let’s say that A’s salary is Rs. 20,000 and he gets a Gratuity of 8, 00,000 from the employer. This way using the Gratuity formula

Gratuity Formula = Salary x Tenure x 15/26

= 20,000 X 19 X 15/26 = Rs. 2, 19,230

Now Rs. 8, 00,000 – Rs. 2, 19,230 = Rs. 5,80,769  this is the amount which is taxable to A.

This is how taxability did in Gratuity.

Gratuity Rules

There are some rules of Gratuity which apply to both the employee and the employer. So here are the rules which you should know.

  • If an employer employs more than ten employees, then he is bound to pay gratuity.
  • Minimum of 5 years of continuous service is required for an employee to get Gratuity. The leaves, sick leaves, strikes or any interruption which is not due to the fault of an employee will not count. This employee’s service will be considered continuous.
  • In case the employee dies before the period of 5 years of service then, also the nominee will receive Gratuity.
  • Gratuity is non-taxable, or you can say it is tax-free. However, tax-free Gratuity only gave when it calculated with the right formula. Moreover, the Gratuity is non-taxable to only government employees, employee retired or employee dead.
  • If employee caused loss to the company, then he can forfeit his gratuity to compensate the loss. In this very case, the employer also has to terminate the employee from the services because of the loss.
  • The Gratuity amount gets bigger at the time of service of the employee increases.
  • 10, 00,000 is the maximum Gratuity amount one can get.

Gratuity Act 1972 – Gratuity Act India – Payment:

Gratuity Act 1972 Also called gratuity act India, payment of gratuity act and gratuity act amendment. Gratuity Act 1972 offers a part of the salary of the employee (in gratitude to all the services) by the employer. In simple words, we can say that Gratuity is an additional salary which every employee receives at the time of his/her retirement or while resigning from the job.

It is a verbal act of offering the part of the salary to the employee by the employer in return for the services which he/she has done for the company. It was not offered to all the employees, not given to those who are eligible for the same. If an employee is eligible for Gratuity, then it is added to his/her final salary.

Gratuity Act 1972 – Gratuity Act India:

Eligibility Requirements:

One has to be eligible for getting Gratuity or applying for it.The eligibility criterion is as follows:

  • If the person works at a shop or a company which comes under Gratuity Act 1972.
  • One must have to be a regular employee of a company for at least five continuous years. 240 days minimum in a year of regular service is must be eligible for Gratuity.

If the employee fulfills the eligibility criteria, then he/she can get or apply for Gratuity under Gratuity Act.

Payment of Gratuity Act:

Ways to get Gratuity:

  1. The employer gives the Gratuity directly to the employee along with the final salary.
  2. The employee has to apply for Gratuity with a written application within 30 days of retirement or resignation.

If the employee is aware of their retirement date, then he/she can apply for Gratuity in advance itself. One more point to keep in mind is that Gratuity is taxable which means that the employee has to pay tax on the same.

Gratuity Act 1972 Also called gratuity act India, payment of gratuity act and gratuity act amendment.

These are the basic rules of Gratuity which needs to be followed by everyone.