January 30, 2023
Swathi v prabhu

Gratuity fund-eligibility, computation and taxation rules

Every organization is liable to pay a certain sum of money to their employees for providing their know-how, and intellectual or technical skills. This certain sum of money is called the gratuity fund and is paid by the employer to the employee.

It is paid at the time of resignation or retirement, provided that the employee has completed at least 5 years of continuous service. However, in certain cases, the 5-year rule is eliminated or relaxed in circumstantial cases such as death, disability, etc.

Let us understand a bit more about the concept of gratuity funds in this article

How to be eligible for gratuity?

Since gratuity is a financial component of the employee’s salary paid at the time of resignation or retirement, provided they have worked for a continuous period of 5 years. Certain conditions have to be fulfilled to be eligible for this gratuity fund. Some of the criteria are as follows:-

1. You should be eligible for superannuation (means attainment of the maximum age of service as fixed by the organization)

2. You should have retired from service

3. You should have resigned after continuous employment for 5 years with the organization

4. Upon your death or disablement, the amount is paid to the nominee

These are some of the basic conditions which one has to fulfill to avail of gratuity. However, it also varies from company-to-company.

How to calculate gratuity?

To calculate the gratuity amount, two important considerations are the number of service years in the company and the last drawn salary.

The formula:-

Gratuity= n x b x 15 / 26

n= the service tenure completed by an individual in a company

b= Basic Salary last drawn by an individual + Dearness Allowance

No set percentage is provided by the law for calculating the actual gratuity amount that an employee gets after retirement or resignation.

Some important points:-

1. As per the provisions of the gratuity act, no gratuity amount can be greater than 10 lakhs. Any excess amount will be considered ex-gratia

2. If the last remaining months in the last year of one’s employment are more than 6 months, then it is rounded up to the next number. For example, if your service tenure is 15 months or 8 months, then you would get the gratuity of 16 months

The two methods to calculate gratuity

1. Employees who come under this act

For employees who come under the gratuity act, the following formula is used to calculate the respective gratuity amount-

15 x last drawn salary x tenure of working / 26

2. Employees who are not covered under this act

For employees not covered under the gratuity act, the following formula is used to calculate the respective gratuity amount-

15 x last drawn salary x tenure of working / 30

Taxation rules of gratuity

The respective tax to be levied on gratuity depends on the type of employee who has to receive the gratuity:-

1. The amount of gratuity received by any government employee (whether central / state / local authority) is exempted from income tax

2. Any other eligible private employee whose employer is covered under the Payment of Gratuity Act. The least of the following three amounts will be exempted from income tax:

3. Rs. 20 lakh

4. The actual amount of gratuity received

5. The eligible gratuity

Gratuity compensation in case of death of an employee

In case of death or demise of an employee, the gratuity amount is calculated on the basis of terms of service of the employee.

Terms of service: Amount payable towards gratuity

Less than 1 year: 2 x basic salary

1 year or more but less than 5 years: 6 x basic salary

5 years or more but less than 11 years: 12 x basic salary

11 years or more but less than 20 years: 20 x basic salary

20 years or more: Half of the Basic Salary for each completed 6-month period. However, it is subject to a maximum of 33 times of Basic Salary


1. Is the notice period considered for gratuity?

Gratuity is calculated from the day you have joined an organization till the last working day including your notice period as you get a salary for that time as well.

2. Can I get a gratuity if I resign?

As per Gratuity Act, gratuity is payable only after the completion of 5 years of your service. If you resign before 5 years of service, then you are not eligible to get gratuity.

3. Does the gratuity amount have an upper limit?

For government employees, the upper limit of gratuity amount is increased to Rs. 20 lakhs (according to amendments made after the 7th pay commission). However, for non-government employees, the limit of gratuity is Rs. 10 lakhs as of now.


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