Quick facts about Gratuity
- Gratuity is tax-free up to a limit of ₹20 Lakhs for private sector employees.
- Gratuity is paid within 30 days from the date the company receives the application.
- If your tenure of service is 16 years 7 months, then you receive the gratuity for 17 years. If its for 16 years 4 months then you'll receive gratuity for 16 years.
Gratuity Exemption & Calculation Guide
Salary Definitions for Gratuity
For gratuity computation, "Last Drawn Salary" only accounts for basic salary and dearness allowance:
Bonuses, commissions, special allowances, and HRA are not included in this calculation.
Why is 5 Years Required?
According to Section 4 of the Payment of Gratuity Act, 1972:
- An employee must render a minimum of 5 years of continuous service with the same employer to qualify.
- This 5-year requirement is waived in unfortunate circumstances such as employee disablement or death.
Frequently Asked Questions (FAQs)
What is the mathematical formula used for Gratuity?
The formula is: Gratuity = (15 × Last Drawn Salary × Service Years) / 26. Here, 26 represents the number of working days in a month, and 15 represents the salary payable for half a month.
How is the service period rounded up or down?
Any service duration exceeding 6 months is rounded up to the nearest year. For example, a tenure of 6 years 7 months is considered 7 years. A tenure of 6 years 5 months is rounded down to 6 years.
Is gratuity taxable?
For government employees, the entire gratuity amount is completely tax-free. For private-sector employees covered under the Payment of Gratuity Act, the gratuity is tax-free up to ₹20 Lakhs. Any amount received above this threshold is taxable as per individual tax slabs.