Benefits Calculation Under Gratuity Act

Gratuity is provided to Employees in recognition of their service rendered to the Organization. The minimum tenure of service to be eligible for Gratuity is 5 years (4 years and 240 days). Benefits Calculation Under Gratuity Act is simple and easy to understand.

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 on the same. Refer to the link shared below.

Gratuity Act 1972

HOW DOES IT WORK?

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 at least 500 employees, may claim exemption from mandatory insurance.

Every Employer should get his Establishment registered with the Controlling Authority.

Benefits Calculation Under Gratuity Act

Covered Under Gratuity Act

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/salary (Basic + DA) is arrived by dividing the last drawn wage by 26.

(It is divided by 26 and not 30 because a month comprises of 4 weeks and 4 weekly leaves is excluded from calculation as per the Act)

Illustration (Covered under Gratuity 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 :- (35000*15/26)* 20 = Rs 4,03,846/-.

The illustration shown above is applicable for Benefits Calculation Under Gratuity Act, for Employees covered under the Act.

However in case of employees, not covered under the Gratuity Act, the calculation is a slightly different.

Benefits Calculation For Individuals Not Covered Under The Act

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.)

Average Salary of Last 10 months * No of Years Completed * ½

Illustration (Not Covered Under Gratuity Act):-

Mr.B worked in M/S XYZ Enterprise for 20 years. His last drawn salary was Rs 50,000/- pm. His (Basic pay + DA) = Rs 30,000/- pm.

Average 10 months’ Salary (Rs 3,00,000/10) : Rs 30,000/-

No of Years Completed : 20 years

Gratuity Receivable by Mr. B: (30,000*1/2)* 20 = Rs 3,00,000/-

TAX IMPLICATION ON GRATUITY

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 20,00,000/- (Twenty Lakhs).