What is Gratuity in Salary

Have you ever worked at a company for several years and heard someone say, “You’ll get your gratuity when you leave”? If you’ve wondered what that means, this article is just for you.

Gratuity is a gesture of appreciation from your employer for your long-term commitment and service. But understanding how it works, who’s eligible, how to claim it, and what tax benefits apply can be tricky. Don’t worry—we’ve got you covered.

Let’s break it down in simple terms.

What is Gratuity?

Gratuity is a lump sum amount paid by an employer to an employee as a token of gratitude for the services rendered over the years. It’s payable when an employee leaves the organization after completing a minimum number of years in service.This could be due to resignation, retirement, death, or disability.

Think of it as a ‘thank you’ from your company for sticking around.

The Payment of Gratuity Act, 1972

To ensure employees receive gratuity fairly and systematically, the Government of India passed the Payment of Gratuity Act in 1972.

Under this law:

• Any business or organization with 10 or more employees must pay gratuity.
  
• The employee must have worked continuously for at least 5 years.
  
• It applies to private sector, public sector, and government jobs alike.
  

How is Gratuity Calculated in India?

Gratuity is an amount that is carefully calculated based on specific rules. The primary factors that determine your gratuity include your last drawn salary (specifically the basic pay plus dearness allowance) and the total number of years you’ve served in the organization. This ensures that the benefit you receive is fair and proportionate to your commitment and length of service.

Let’s decode the formula first.

Gratuity Formula

Here’s the standard gratuity formula used for employees covered under the Gratuity Act:

Gratuity = (15 × Last Drawn Salary × Number of Years of Service) ÷ 26

• Last drawn salary = Basic + Dearness Allowance (DA)
  
• The number 15 represents 15 days’ salary per year.
  
• The number 26 is the number of working days in a month (excluding Sundays).

Example: If your last drawn salary was ₹40,000 and you worked for 10 years:

Gratuity = (15 × 40,000 × 10) ÷ 26 = ₹2,30,769

Note: For employees not covered under the Gratuity Act, a slightly different calculation is followed (usually based on 30 days instead of 26).

Income Tax on Gratuity in India

Now comes the question we all ask: Do we have to pay tax on the gratuity amount?

The answer: It depends.

Gratuity is tax-exempt up to a certain limit under Section 10(10) of the Income Tax Act. Beyond that limit, the excess amount is taxable as “Income from Salary.”

In India, the tax treatment of gratuity is governed by the Income Tax Act, 1961, under Section 10(10). While gratuity is a great financial benefit, it’s important to understand how much of it is tax-free—because the exemption rules differ based on your type of employment.

Here’s a simplified breakdown of how tax exemptions work:

1. For Government Employees

If you are a central, state, or local government employee, gratuity received upon retirement, superannuation, resignation, or death is completely tax-exempt. You don’t have to pay any tax on it, regardless of the amount.

2. For Private Sector Employees Covered Under the Gratuity Act, 1972

If you work in a private company that is covered under the Payment of Gratuity Act, 1972, the gratuity you receive is tax-exempt up to the lowest of the following three amounts:

• The actual amount of gratuity received
• 15 days’ salary for each completed year of service
  (Formula: Last drawn salary × 15 ÷ 26 × number of years of service)
• ₹20 lakh (the government increased this limit from ₹10 lakh to ₹20 lakh on 29th March 2018)
  

3. For Private Sector Employees Not Covered Under the Gratuity Act

If your organization does not fall under the Gratuity Act, then your exemption is based on slightly different criteria. You’ll get a tax exemption up to the least of the following:

• The actual gratuity received
  
• Half a month’s average salary for each completed year of service
  (Formula: Average monthly salary of the last 10 months × ½ × number of years of service)
  
• ₹10 lakh (fixed exemption limit)
  

Additional Conditions to Note

• The ₹20 lakh exemption limit is applicable only if the gratuity is received for retirement, resignation, or death on or after 29th March 2018.
  
• To qualify for gratuity under the Gratuity Act, the employee must complete at least 5 years of continuous service, unless gratuity is being paid due to death or permanent disability, in which case the 5-year rule doesn’t apply.

What If Gratuity Exceeds the Tax-Free Limit?

If the gratuity amount you receive goes beyond the allowed tax exemption, the excess amount becomes taxable:

• For employees, the excess is taxed as part of their salary income.
  
• If gratuity is received by nominees or legal heirs (in the case of the employee’s death), the taxable portion is treated as “Income from Other Sources” in their tax return.
  

In short: Know your category, calculate your tax-free limit, and plan accordingly to make the most of your gratuity benefit without unwanted surprises from the tax department.

How to Claim Gratuity from Employer in India

Claiming gratuity is a straightforward process if you follow these steps:

1. Submit a Gratuity Application: Write to your employer using Form I within 30 days of leaving the job.
   
2. Employer’s Response: They should acknowledge and settle your gratuity within 30 days of receiving the application.
   
3. Mode of Payment: The amount is usually paid via cheque or direct bank transfer.
   

If your employer delays or denies payment, you can:

• Approach the Controlling Authority under the Gratuity Act
  
• File a complaint within 90 days of the issue
  

Gratuity Eligibility

To be eligible for gratuity in India, you must meet the following conditions:

✅ Worked in a company that has 10 or more employees
✅ Completed at least 5 years of continuous service
✅ Left the job due to resignation, retirement, death, or disability

⚠️ Exception: In case of death or permanent disability, the 5-year rule is not mandatory. Family/legal heirs can claim gratuity.

5 Mistakes to Avoid While Claiming Your Gratuity

Gratuity can be a well-earned financial cushion—don’t let small mistakes cost you. Watch out for these common errors:

Not Knowing You’re Eligible: Many employees don’t even know they qualify. Always check with HR or your offer letter.

Missing the Claim Deadline: You must file a claim within 30 days of leaving your job. Delays may result in complications.

Incorrect Service Duration Count: Always round down partial years if less than 6 months, and round up if more than 6 months. For example, 7 years and 7 months is counted as 8 years.

Ignoring Tax Implications: Plan your finances and tax savings if your gratuity exceeds ₹20 lakh.

Not Keeping Proof of Employment: Always keep your appointment letter, salary slips, and resignation letter handy—they’re essential for claiming gratuity.

Final Thoughts

Gratuity is more than just a retirement benefit—it’s your right as an employee. Understanding how it works helps you plan better for the future and ensures you don’t leave money on the table.

If you’ve completed 5 years of service, don’t wait—check your eligibility, calculate your due, and file your claim the right way. It’s a reward you’ve earned.

Have any questions about your gratuity claim? Drop them in the comments or share your experience—because your story might just help someone else.

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