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Benefits Calculation Under Gratuity Act

Sunday, December 7th, 2014 Amritesh no responses

In my earlier post I have discussed about the Gratuity Act,1972 and the salient features of the act. Here I would discuss the calculation of Gratuity and Tax Liability of same.

Follow the Link to Read Salient Features about the Gratuity Act,1972.


Every employer has to obtain insurance for his liability to pay gratuity from a Life Insurer. But if an employer has already established an approved Gratuity Fund [as per Section 2(5) of the Income Tax Act] or who having an approved gratuity fund with atleast 500 employees, may claim exemption from mandatory insurance.
Every Employer should get his Establishment registered with the Controlling Authority.


Gratuity Payable: 15 days’ wages * No of Completed Years of Service
Points to Note: Part of a year in excess of 6 months is counted as one year.
                          15 days’ wage (Basic + DA) is arrived by dividing the last drawn wage by 26. (It is divided by 26 and not 30 because in a month 4 holidays are earned and thus excluded from calculation as per the Act)
Mr.A worked in X Ltd for 20 years. His last drawn salary was Rs 55,000/- pm. His (Basic pay + DA)= Rs 35,000/- pm.
Gratuity Receivable by Mr.A will be:- (35000*15/26)* 20 = Rs 4,03,846/-.
However incase of employees, not covered under the Gratuity Act, the calculation is a tad different.
Average of Last 10 months Salary is taken into account and same is divided by 2 (fractions ignored), then again multiplied by the number of years worked.
Here you also ignore any fraction of year. (If somebody has worked for 10 years and 8 months, then it will be rounded off as 10 years only.)

The tax treatment varies for different categories of assessee as mentioned below:-

Government Employees’
Employees’ Covered under Gratuity Act, 1972
Employees’ Not covered under Gratuity Act.
For Government Employees’: The Gratuity is fully exempted.

For Non Government Employees Covered/Not Covered Under Gratuity Act: Maximum exemption granted is Rs 10,00,000/-. Any amount above it is liable for Tax.
Amritesh is an experienced professional in the field of HR, Finance and Compliance. He is currently working in the IT Industry with an US based firm. He took up Blogging as a hobby which eventually turned into passion. He primarily focuses on topics related to Personal Finance, HR, Compliance and Technology.

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