Employee Benefits in India – Payment of Gratuity – Method of Calculation and Income Tax

Posted by on April 19, 2017

The quantum of gratuity is to be computed at the rate of 15 days of salary [7 days of wages in case of seasonal establishments] based on rate of wages last drawn by the employee concerned for every completed year of service or a part thereof exceeding SIX months.

Calculation of Gratuity –

In case of monthly salaried employee

Gratuity Payable = Last drawn Salary × 15/26 × Completed years of Service

Please take note –

If an employee has worked for 5 years and 7 months, his gratuity shall be calculated for 6 Years and if an employee has worked for 5 and 5 months, his gratuity shall be calculated for 5 years

Gratuity shall be calculated on sum total of Basic + Dearness Allowance (DA) [DA is called differently in some states of India. Example, it is called Special Allowance in the state of Maharashtra]

In case of piece-rated employee

Gratuity Payable = Last drawn wages × 15 × Completed years of Service

In this case, Last drawn wages = [Total wages drawn in last THREE months preceding termination] / [Number of days worked]

Employee of a Seasonal Establishment

Employee of seasonal establishment shall be paid gratuity at the rate of 7 days wages for each season.

Let’s understand this with examples of frequently asked questions –

FAQ – 1 Natasha Suri joined Company B on 12th September 2004. She resigned on 18th June 2010. At the time of her resignation, her salary components as per her payslip were: Basic – 40,000/- INR, HRA – 20,000/- INR, Conveyance – 5,000/- INR, Medical – 6,000/- INR, Telephone – 4,000/- INR and Food – 3,000/- INR. What shall be her gratuity?

Answer – Gratuity payable to Natasha Suri = (40,000/26)*15*5 = 115,385 INR.

Even though she has not completed FIVE years of continuous service, however, she worked for more than 240 days in her 5th year of service. For the purpose of calculation of gratuity, it will be considered as if she has completed FIVE years.

FAQ – 2 Pankaj Mathur is working with Company Z since 11th March 1998. He is working for SIX days a week. He resigned on 18th January 2012. His payslip of last month reads as: Basic – 70,000/- INR, DA – 4,500/- INR, HRA – 35,000/- INR, Conveyance – 8,000/- INR and Medical – 12,000/- INR. Calculate his Gratuity.

Answer: Gratuity Payable to Pankaj shall be = (70,000+4,500)/26*15*14 = 601,731/- INR

Pankaj Mathur is getting Basic as well as Dearness allowance.

FAQ – 3 Ruchi Srivastava joined Company M on 10th June 2005. She took maternity leave from 1st July 2007 to 31st October 2007. Later, she decided to take voluntary break of 18 months to take care of her new born baby. She re-joined the company on 1st April 2009. She resigned on 30th August 2014. Her last working day with organization was 31st October 2014. At that time, her Basic Salary was 38,000/- INR. Calculate the amount of gratuity payable to her.

Answer – Gratuity Payable to Ruchi = (38,000/26)*15*6 = 131,538/- INR

Even though Ruchi joined the company on 10th June 2005, however, she took break of 18 months and hence it shall not be considered as continuous service. Her joining on 1st April 2009 shall be considered as new employment. Also, though she resigned on 30th August 2014 after the completion of 5 years and 5 months but last working day was 31st October 2014 and why that time she had completed 5 years and 7 months of continuous service. Hence, she will be paid gratuity for SIX Years.

FAQ – 4 Sameer Sharma is working with Company XYZ since 14th February 1999. He resigned on 3rd December 2006. He was paid gratuity at the time of separation. He joined back the company on 15th June 2008 and resigned on 17th October 2014. His salary slip for the Month of September has following components: Basic – 40,000/- INR, HRA – 16,000/- INR, DA – 4,000/- INR, Conveyance – 5,000/- INR, Medical – 4,000/- INR, Performance Bonus – 65,000/- INR. Is he entitled for the Gratuity? What will be his Gratuity amount?

Answer: Yes, Sameer is entitled for gratuity. Gratuity payable to Sameer = (40,000/26)*15*6 = 138,462/- INR. An employee can withdraw gratuity from multiple employers or from same employer, if he is completing multiple stints of five years, however, the total amount of gratuity shall not be more than 1,000,000/- INR. Employee becomes eligible to gratuity only if he has completed FIVE years at the time of retirement, resignation, and superannuation. His nominees or heirs, become entitled to his gratuity in case of his death or disablement, even if he has not completed FIVE years of continuous service.

How does gratuity get treated under Income Tax rules?

Exemption of gratuity is covered under Section 10 (10) of Income Tax. For the purpose of exemption, employees are divided under three categories:

  1. Any amount of gratuity received by Central and State Government employees, Defence employees and employees in Local authority at the time of retirement or in case of death shall be fully exempted.
  2. Any gratuity received by persons covered under the Payment of Gratuity Act, 1972 shall be exempt subject to following limits:-

Gratuity amount calculated at the rate of 15 days of salary for every completed year or part thereof on the basis of last drawn basic salary, OR 1,000,000/- INR, Whichever is less

  1. In case of any other employee, gratuity received shall be exempt, subject to the following exemptions –

Exemption shall be limited to half month salary (based on last 10 months average) for each completed year of service or 1,000,000 INR, whichever is less

For employees, who are not covered under this Act, the manner of calculating gratuity is different.

Average salary shall be calculated as [total salary paid in last 10 months (this will include the basic plus dearness allowance plus commission as a percentage of turnovers achieved by the employee) divided by 30]. This amount then shall be multiplied by 15 and number of completed years or fraction thereof. Dividing the daily salary by 30 instead of 26 does put those not covered by the Gratuity Act at a disadvantage.

Please take note that gratuity received by an employee on his retirement is taxable under the head “Salary” and gratuity received by the legal heir is taxable under the head” Income from Other Sources”.

The gratuity payable to an employee shall be wholly forfeited, if his services are terminated on account for his riotous or disorderly conduct or any other act of violence on his part or for any act which constitutes an offence involving moral turpitude.

The gratuity of an employee whose service have been terminated for any Act of wilful omission or negligence causing any damage or loss to or destruction of property belonging to the employer, gratuity shall be forfeited to the extent of the damage or loss caused. The right of forfeiture is limited to the extent of damage.

We hope this information will be of use to you.

Source by Sanjeev Himachali

Posted in: Uncategorized

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