Gratuity FAQs: How to calculate, Gratuity Act, IT exemption and more

There are several perks if you work with an organisation for a long period. One of them is the gratuity amount. According to the Payment of Gratuity Act 1972, gratuity is a benefit that is payable, it is the lump sum amount of money that is received by employees from the employer as a token of appreciation for the services rendered by them during the period of employment.
Gratuity is one of the components that make up an employee's gross salary. The employees are only eligible to withdraw the amount of gratuity after their completion of 5 years in the same organisation.
Informally, gratuity means "Thank You" in the form of monetary benefit to the employee for faithful services provided. It is usually paid at the time of retirement but it can be paid earlier, keeping in view certain conditions.
As per the Section 4 of the Gratuity Act, in case of a job termination due to the death of an employee or disability, the condition of at least five-year into service is not applicable. In case of an employee's death, the gratuity amount will be received by the nominee or the legal heir.
The Payment of Gratuity Act, 1972 applies to all organisations, including companies, factories, oil fields, mines, ports, plantations, railways, shops and establishments having more than 10 workers.
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The gratuity amount received by an employee is based on the tenure of the service and the last drawn salary. It is calculated on the basis of basic salary and dearness allowance (DA). In terms of gratuity calculation, every month is considered 26 days for the organisations covered under the Gratuity Act.
Gratuity is paid for every 15 days for the service of each completed year. If an employee provides services for more than six months in the last year of employment, it will be rounded off to the next number.
For example, if an employee serves for a total period of 7 years and 8 months, it will be considered 8 years for gratuity calculation.
Gratuity calculation formula: Last drawn salary (basic salary + DA) * number of completed years of service * 15/26.
The employees of an organisation who are not covered under the Payment of Gratuity Act 1972 are also eligible for the gratuity amount, but the total number of days in a month will be considered 30.
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Income tax exemption on gratuity
Gratuity amounts earned by government employees are entitled to a full exemption from income tax.
In case of non-government employees, the Gratuity Act 1972 has two categories to calculate how much gratuity is payable:
For employees of private sector who are covered under the Payment of Gratuity Act, 1972

For employees of private sector who are not covered under the Gratuity Act

(Source: Chief Labour Commissioner (Central) website)