Gratuity Formula – Rules, Limit, Eligibility & Calculation 2019

How to calculate gratuity amount using gratuity formula in 2019? The latest amendment bill increased the new limit of gratuity to Rs. 20 lakhs . This article covers

1. Gratuity Formula – Last drawn salary X  years of service X 15/26.
2. Gratuity New Limit – Rs. 20 Lakhs
3. Gratuity Eligibility – 5 Years of Services
4. Rules – Gratuity is Mandatory
5. Gratuity Calculations

What is gratuity in salary slip in India?

Gratuity is a sum of money paid by an employer to the employee. Nowadays, gratuity is paid by both the public sector and private sector employers. Generally, gratuity is included in your salary as a part of the cost to the company (CTC) when the employee joins the company. He is eligible to claim gratuity only after the expiry of a particular amount of time or on retirement, whichever is earlier.

The gratuity in most cases forms a part of the CTC to the company. This does not form a part of the salary slip.

What is percentage of gratuity in CTC?

Gratuity percentage is a not a part of CTC, it is a part of basic salary.

What percentage of basic salary is gratuity?

Gratuity is 4.81 percentage of basic salary.

Is Gratuity same as tip?

No, gratuity is not same as tip. Gratuity is the monetary benefit given to the employees for being associated with the company for long term.

Gratuity Rules 2019

Let us understand Gratuity rules for 2019 with the help of FAQs

Is gratuity mandatory? Do companies have to pay gratuity?

Yes, gratuity is mandatory in India for companies having ten or more employees in the twelve preceding months.  This is mandatory for both public and private limited companies. Under the Payment of Gratuity Act, the employee can demand and receive gratuity as a part of his or her terms of employment.

How many years to be completed for gratuity?

Gratuity on active employment, VRS or voluntary retirement scheme is applicable only if the employee has completed a minimum of five years. The same provision applies for termination also.

20 lakhs gratuity Limit- Latest News- Gratuity Amendment Notification 2019

As per the latest notification, The maximum amount limit of gratuity has recently increased by the Parliament under the Payment of Gratuity Act to 20 lakhs from the previous amount of 10 lakhs. The latest amendment news came in March 2018.

Gratuity Eligibility 2019

Who is eligible for gratuity in 2019? Is gratuity available for all employees?

In order to be eligible for gratuity, the number of employees in the company has to be more than 10. Every employee should also have completed a minimum of 5 years of uninterrupted service in the company. The Act does not distinguish between temporary staff and permanent staff for the calculation of gratuity. As long as temporary staff are called employees, they will also be eligible for receiving benefits under the Payment of Gratuity Act 1972.  As per the Act, uninterrupted service is continuous employment. Any disruptions in employment due to the following reasons will not disadvantage the employee and he will still be deemed to be in uninterrupted service – disruptions due to sickness, accident, allowed leave, layoff, strikes, lockouts etc.

What happens if the employee is not able to complete the five years of service ?

In case the employee is unable to complete the five years of service due to death or disablement, he will be awarded gratuity as if he had originally completed five years of service. That is, he will be deemed to have completed five years of service for the purpose of the Act. But the amount of gratuity will be on the actual number of years completed and not five years.

In all other cases, the employee will not be eligible for receiving gratuity.

Are there any nuances for calculating the five years? Is it mandatory the employee has to work every day in a year ?

According to the Payment of Gratuity Act, the employee should have at least worked for 190 days out of 365 days in case he works below the ground. All kinds of mining activities come under this rule.

In cases where the employee works above the ground, he should have at least worked for 240 days out of 365 days.

Therefore, the employee need not work every day in a year to get the benefits of gratuity

Gratuity Formula 2019

How is gratuity calculated?

Gratuity formula, for calculation of gratuity,depends on the period of employment, last drawn salary, and number of completed years of service.

Gratuity Formula  – Covered under Payment of Gratuity Act 1972

The Gratuity formula for employees in 2019, covered under the act is

Last drawn salary (basic salary plus dearness allowance) X number of completed years of service X 15/26.

What is 15/26 in Gratuity calculation?

Total No of working Days in a Month -26 Days

Number of days employee has worked- 15 Days

Gratuity Formula  – Not covered under Payment of Gratuity Act 1972

The Gratuity formula for employees in 2019, not covered under the act  is

Gratuity = Average salary X ½  X No. of years of service

where average salary is basic plus DA plus commission.

Gratuity Calculation 2019 – Example

Mr A works for 10 years in ABC Ltd. ABC Ltd falls under the ambit of the Payment of Gratuity Act. His last received salary is 26000 Rs per month(basic plus DA). How do we determine the amount of gratuity payable to Mr A?

In order to find out the amount, we should first understand the formula for calculation of gratuity.

Gratuity = Last drawn salary * 15/26 * No. of completed years of service.

In this case, the gratuity amount will be as Rs 26000 x 15/26 x 10 years=  Rs.150000.

How to calculate gratuity in death case?

In the case of death of an employee, even if the employee works for less than the five years, he will be eligible to get gratuity for the number of years of completed service.

Gratuity Taxation

Is gratuity taxable?

Let us check if the gratuity is taxable-

For companies covered under the Payment of Gratuity Act,  the least of the following is exempt from tax –

• Last salary (basic + DA)* number of years of employment* 15/26;
• Rs. 20,00,000
• Gratuity Actually received

For employees not covered under the Payment of Gratuity Act, the least of the following is exempt from tax –

• Last 10 month’s average salary (basic + DA + commission)* number of years of employment* 1/2;
• Rs. 20,00,000
• Gratuity actually received

Gratuity limit exemption for Cenral govt employees and State govt employee

Any gratuity paid by the government to its employees is fully exempt from tax, be it a central govt employee or state govt employee

• Example One – Mr A works for the State Government. He has worked for the last 15 years, and decides to retire from his service at the end of the 15^th The amount of gratuity paid to him is Rs. 35 lakhs. Determine the amount of tax payable by Mr. A.

Since Mr A is a government employee, any gratuity amount would be fully exempt from tax. Therefore, Mr A does not have any tax liability on his gratuity even though it has exceeded the mandated amount of 20 lakhs.

How to calculate gratuity limit exemption for private sector employees?

• Example Two – Let us now assume Mr A works for a private sector company, and not the government. He has worked for the last 15 years.Then he decides to retire from his service at the end of the 15^th year.The amount of gratuity paid to him is Rs. 35 lakhs. Determine the amount of tax payable by Mr. A.

In this scenario, since Mr A does not work for the government, gratuity above Rs. 30 lakhs will be taxable. The amount specified  is Rs. 20 lakhs or 15/26 of the last drawn salary multiplied by the number of years of completed service, whichever is lower. Assuming 20 lakhs is lower, Mr A is liable to pay tax on the excess amount, which is 15 lakhs.

Is both central and state government employees’ gratuity exempt from tax?

Yes, the exemption is valid for both Central and State governments.

Gratuity forfeiture by the employer

In case an employee is

• Terminated for any act due to his negligence or willful omission,If this act results in any loss or destruction of property, the employer can forfeit the employee’s gratuity.

In case Mr A, due to his negligence, causes a fire in the factory. The company terminates him after 8 years of service.He will not be eligible for gratuity if the employer chooses to forfeit the same.