Gratuity Eligibility in India 2024: Full Details, Rules, Calculator, and Tax Implication

Gratuity is a monetary benefit that employers pay to their employees as a token of appreciation for their service. It is a part of the salary that an employee receives and can be considered a retirement benefit plan. However, gratuity are not paid automatically to every employee.

There are certain eligibility criteria and rules that govern the payment of gratuity in India.

In this blog post, we will explain what gratuity is, how it is calculated, Gratuity Eligibility in India, and what the tax implications of receiving a gratuity are.

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What is Gratuity?

A gratuity is a lump sum amount that an employer pays to an employee when the employee leaves the job after serving the same organization for a minimum of 5 years.

It is a statutory right of an employee under the Payment of Gratuity Act, of 1972, which was enacted to provide social security and financial assistance to workers after retirement, resignation, death, or disablement.

Gratuity is based on the last drawn salary and the number of years of service of an employee. The last drawn salary includes the basic salary and dearness allowance (DA) but excludes any other allowances or bonuses.

The number of years of service is rounded off to the nearest integer. For example, if an employee has worked for 6 years and 7 months, it will be counted as 7 years. However, if an employee has worked for 6 years and 5 months, it will be counted as 6 years.

The formula for calculating gratuity is as follows:

Gratuity = (15 x Last drawn salary x Number of years of service) / 26

For example, if an employee has worked for 10 years and has a last drawn salary of Rs. 30,000 (including basic and DA), then the gratuity amount will be:

Gratuity = (15 x 30,000 x 10) / 26 Gratuity = Rs. 1,73,076.92

However, an employer can choose to pay more than the statutory amount of gratuity to an employee as a goodwill gesture.

Gratuity Eligibility in India

According to the Payment of Gratuity Act, of 1972, an employee is eligible for gratuity if he or she meets any of the following conditions:

• The employee has completed 5 or more years of continuous service with the same employer. However, this condition does not apply in the case of the death or disablement of an employee due to an accident or disease.
• The employee has retired from service.
• The employee has resigned from service after completing 5 or more years of service.
• The employee has attained the age of superannuation, which is the age fixed by the employer for retirement.
• The employee has died or become disabled due to an accident or disease.

The Payment of Gratuity Act covers all types of employees, whether they are permanent, temporary, contractual, part-time, or seasonal. It also covers employees who work in factories, mines, oilfields, plantations, ports, railways, shops, or other establishments that have 10 or more employees.

However, there are some exceptions to the eligibility criteria for gratuity. For example, teachers and other staff members of educational institutions are not covered by the Payment of Gratuity Act unless they are notified by the central or state government. Similarly, apprentices and trainees are not eligible for gratuity as they are not considered employees.

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What are the Rules for Payment of Gratuity?

The Payment of Gratuity Act lays down certain rules and procedures for the payment of gratuity to eligible employees. Some of these rules are:

• An employer must pay gratuity within 30 days from the date it becomes payable. If there is any delay in payment, the employer must pay interest on the amount at a rate notified by the government.
• An employee must apply for gratuity in writing to the employer within 30 days from the date it becomes payable. If an employee dies before receiving a gratuity, his or her nominee or legal heir must apply for it within one year from the date it becomes payable.
• An employer must inform an employee about his or her eligibility and the amount of gratuity within 15 days from the date it becomes payable. The employer must also specify how the amount has been calculated and whether any deductions have been made.
• An employer can deduct any amount from the gratuity that is due to an employee if he or she has caused any damage or loss to the employer’s property or assets by his or her negligence or wilful misconduct. However, such a deduction cannot exceed the actual amount of damage or loss.
• An employer can forfeit gratuity wholly or partially if an employee has been terminated from service due to his or her misconduct involving fraud, violence, or riotous behavior.

What are the Tax Implications of Receiving Gratuity?

Gratuity is a taxable income under the head “Salaries” in the Income Tax Act, of 1961. However, an employee can claim exemption from tax on gratuity up to a certain limit, depending on whether he or she is covered by the Payment of Gratuity Act or not.

For employees who are covered by the Payment of Gratuity Act, the maximum amount of exemption is the least of the following:

• Rs. 20 lakh
• The actual amount of gratuity received
• 15 days’ salary for each completed year of service or part thereof

For employees who are not covered by the Payment of Gratuity Act, the maximum amount of exemption is the least of the following:

• Rs. 10 lakh
• Actual amount of gratuity received
• Half month’s salary for each completed year of service

The salary for the purpose of calculating exemption is the average salary of the last 10 months preceding the month in which gratuity is paid. The salary includes the basic salary and DA but excludes any other allowances or bonuses.

Any amount of gratuity that exceeds the exemption limit is taxable as per the income tax slab rates applicable to the employee.

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Final Thoughts on Gratuity Eligibility in India

Gratuity is a valuable benefit that employees can receive from their employers as a reward for their long and loyal service. However, to avail themselves of gratuity, employees must be aware of their eligibility criteria, calculation formula, payment rules, and tax implications.

I hope this article gave you insights on Gratuity Eligibility in India, If you have any questions then feel free to ask them in the comment section.

FAQs on Gratuity Eligibility in India

 Is 4 years 7 months eligible for gratuity in India?

No, 4 years 7 months of service is not eligible for gratuity in India. Eligibility for gratuity requires completing a minimum of 5 years of service or full-time service with the same employer. Only at this point of service does an employee become eligible for tax-free gratuity, provided by both the government and private sector.

Who is eligible for salary gratuity?

Only employees who have worked for the company for five years or more are eligible for salary gratuity. The gratuity amount is determined by the Payment of Gratuity Act, 1972. However, exceptions can be made if an employee becomes disabled due to an accident or disease before completing five years of service.

Is 4 years 8 months eligible for gratuity?

Yes, if an employee has worked for 4 years and 8 months, they are eligible for gratuity. In this case, the duration is considered as 5 years of continuous service, making the employee eligible for gratuity. However, if an employee has worked for 4 years and 4 months or less, they are not eligible for gratuity.

What are the new rules for gratuity eligibility in India in 2023?

In 2023, the new rules for gratuity state that after 5 years of employment, a gratuity can be requested when changing jobs. In the event of an employee’s death, the nominee or legal heir will receive the gratuity payment. Additionally, if an employee becomes disabled due to an illness or accident, they are entitled to gratuity. These rules ensure fair compensation for employees.