Gratuity Calculation and Its benefits: Making employee’s life easier


Do you know what Gratuity is? If so, how much of the Gratuity is taxable? Do you know when and how a person qualifies for a gratuity payment? 

If not, don’t waste your time and read the entire article to learn everything there is to know about Gratuity, including rules, criteria, a gratuity tax calculator, and much more. 

In this article, we’ll tell you everything about Gratuity in Detail; stay tuned! 

Is Gratuity Subject to Income Tax? 

Gratuity is an expression of gratitude from the company to all the employees who have entered the workforce and stayed with the firm for five or more years or have given a significant portion of their lives to the organisation. 

The government has announced that the sum of Gratuity exempt from paying taxes has been increased. 

Initially, the sum was Rs. 10 lakhs, but it has been revised to Rs. 20 lakhs. This change took effect on March 8, 2019. This rule also applies to any professional who has quit, retired, or is no longer employed. As a result, we can argue that the taxation on resignation gratuity is not applicable. 

What are the eligibility requirements for gratuity pay-out? 

So here are a few considerations for an individual who is eligible for a gratuity: 

  • Retiring 
  • After five years with the same company, he steps down. 
  • If the personnel are no longer employed or cannot work due to physiological limitations. 

Employees who the Gratuity Act covers are entitled to certain Gratuity benefits 

If they have worked continuously for over a year in just about any business (railways, airports, stores, farms, or academic facilities) with more than ten or more employees, they are eligible for Gratuity. 

And, if the company is subject to the Gratuity Act, the employer must pay Gratuity to all employees, even though there are only a few. 

The gratuity sum is calculated in two ways under the Gratuity Act: 

  1. First, the Gratuity Payment Act protects you. 

Suppose the company has at least ten workers on any given period during the year. The gratuity payment act will then apply to all workers who work for this company. Once an organisation is protected under this act, it will always be covered, even if the workforce decreases. 

  1. The Gratuity Payment Act does not protect you. 

If a company employs fewer than ten people in any given period during the year, it is not covered by the gratuity payment laws. However, this does not preclude the employer from refusing to pay a gratuity. 

Gratuity Calculation 

There is no defined methodology or fixed percentage technique for calculating Gratuity under the Gratuity Act. To calculate Gratuity, an employer can utilise a formula-based computation or, in some situations, pay more than the fixed amount. 

As previously stated, gratuities are calculated in two ways for private-sector employees: Let’s look at how to compute Gratuity in these situations. 

Gratuity Calculation for people covered by the Gratuity Payment Act. 

For every completed year of employment or portion thereof in addition to six months, Gratuity is calculated using three weeks of last drawn salary. 

The following is the formula for calculating Gratuity in this category: 

(15 x Salary x Working Years) Divide by 26 

The number of completed employment years from the Date of Arrival is used to determine the total number of employment years. One more year is added if there are any months with a balance of more than six months. 

Ex: If the last drawn salary = INR 60,550 and has served for nine years six months. The gratuity amount is – 

Gratuity amount = (60,550x 10 x 15)/26 = INR 3,49,326.92. 

Taxable Gratuity: Frequently Asked Questions 

Q1. Is Gratuity completely tax-free? 

A1. Government personnel are exempt from paying taxes on gratuities from the government. Another possibility for tax-exempt status is the tax on Gratuity upon retirement and the duty on Gratuity upon the employee’s death. 

Q2. What is the formula for calculating taxable Gratuity? 

A2. The taxable Gratuity is measured in a half-wage month for each year the employee has worked for the company. 

Q3. Do gratuities become taxable after five years? 

A3. Whether a gratuity is taxed or not is determined by measuring the number of funds earned rather than the number of years worked. However, according to the most recent modifications, gratuity tax is exempt up to Rs. 20 lakh for an individual’s work period (regardless of whether he switches companies or not). The gratuity tax relief ceiling is Rs. 20 lakh. 

Q4. Does the employer taxable pay the PF and Gratuity? 

A4. No, the EPF funds and gratuity are tax-free, primarily if you work for the government. Gratuities and EPF funds, on the other hand, are taxed for private employees. In addition, gratuities for private employees are only tax-free in one circumstance: at the end of its service life or if the employee is no longer employed.