Gratuity Calculator India

Payment of Gratuity Act, 1972: Complete Guide

The Payment of Gratuity Act, 1972 is one of the most important labor welfare legislations in India. It mandates that organizations with 10 or more employees must pay a gratuity benefit to eligible workers upon separation from service. The Act applies to factories, mines, oilfields, plantations, ports, railway companies, shops, and establishments as defined under the Act. Once an establishment comes under the purview of the Act, it continues to be covered even if the number of employees falls below 10.

The Gratuity Calculation Formula

The statutory formula differs based on whether the employee is covered under the Act or not:

• Last Drawn Salary: Includes Basic Pay + Dearness Allowance (DA). It does not include HRA, overtime pay, bonus, or commissions.
• 15: Represents 15 days' wages for each completed year of service, as mandated by the Act.
• 26: The number of working days in a month (30 minus 4 Sundays). For employees not covered under the Act, 30 calendar days is used instead.
• Years of Service: Completed years of continuous service. If an employee has worked 6 months or more in the final year, it is rounded up to the next full year.

Worked Example

An employee with a last drawn salary (Basic + DA) of ₹45,000 per month who has completed 12 years and 7 months of service:

• Years of service = 13 (rounded up since 7 months > 6)
• Gratuity = (15 × ₹45,000 × 13) / 26 = ₹3,37,500
• Since ₹3,37,500 is below the ₹20 Lakh exemption limit, the entire amount is tax-free.

Tax Treatment of Gratuity

For government employees (Central, State, or local authority), the entire gratuity received is exempt from income tax under Section 10(10)(i) of the Income Tax Act. For private-sector employees covered under the Act, the least of the following three amounts is exempt: (a) ₹20,00,000, (b) the actual gratuity received, or (c) 15 days' salary for each completed year of service. Any amount exceeding the exemption limit is taxed at the employee's applicable income tax slab rate.

When Is Gratuity Payable?

• Superannuation: When the employee reaches the retirement age defined by the employer.
• Retirement or Resignation: After completing 5 years of continuous service.
• Death or Disablement: Payable to the nominee or legal heir, with no minimum service requirement.
• Timeline: The employer must pay gratuity within 30 days of it becoming payable. Failure to do so attracts simple interest from the employer.