Gratuity is a component of your salary that is received from employer in gratitude for the services offered by you in that company. Gratuity is basically a defined benefit plan which is usually counted as one of the many retirement benefits offered to employee at the time of quitting the job. There are several instances when employee may leave his job including retirement/superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement.

It is one of the least understood component of our salary which is mostly paid by the employer as a token of appreciation for the services rendered.

Here is what you should know about gratuity from eligibility and how to calculate the amount of gratuity.

What is Gratuity in Salary?

It is the monetary amount which is payable to the employee of an organisation under the Payment of Gratuity Act 1972. Gratuity payment is one of the several components that adds up to the gross salary of the employee. However, an employee is eligible to receive the gratuity amount only after completing the mandatory period of 5 or more years with the company. Remember, in case of death of the employee, five continuous years of services is not mandatory. 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. However, if the service period is five years and five months, for gratuity calculation it will be considered five years.

How’s Gratuity calculated?

The amount of gratuity 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.

For instance, if an employee had joined a company on 01-08-2010 and retired or got his job terminated on 30-04-2020, with last drawn basic salary of Rs 20,000 and DA of Rs 12000, his Gratuity will be:

(Rs 20,000+Rs 12000)x 15/26 x 10= Rs 89,230.76

Note: In this case the employee has completed 10 years of service. The seven months of his first year (August 2010 to March 2011 ) is to be counted as one year as it is more than six months of service.

What’s the maximum amount you can get in gratuity?

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

Is gratuity exempted from tax?

It is to be noted that 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.