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How Gratuity Is Calculated, Its Benefits, Tax-Free Limit And More

As per current rules, an employee becomes eligible to claim gratuity benefit only if he/she has rendered five years of continuous service in the organisation.

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How Gratuity Is Calculated, Its Benefits, Tax-Free Limit And More

As per latest rules, gratuity calculation can be done using the last drawn pay figure and service tenure


Highlights

  1. The upper limit of gratuity is Rs 10 Lakh for private sector employees
  2. After the amendment, the upper ceiling will double to Rs 20 lakh.
  3. The limit on gratuity has already been hiked for central govt employees
The Union Cabinet chaired by the Prime Minister Narendra Modi in a meeting on September 12 approved the introduction of the Payment of Gratuity (Amendment) Bill, 2017 in the Parliament. The amendment will increase the maximum tax-free limit of gratuity of employees, in the private sector and in Public Sector Undertakings/Autonomous Organizations under government. The present upper ceiling on gratuity amount is currently at Rs. 10 Lakh for employees in private sector. After the amendment it limit will double to Rs 20 lakh. The limit on gratuity has already been hiked to Rs 20 lakh for central government employees with effect from January 1, 2016, according to the recommendations of 7th pay commission. 

According to current gratuity rules, an employee becomes eligible to claim gratuity benefit only if he/she has rendered five years of continuous service in the organisation.

How gratuity is calculated

According to the current formula for formal sector workers, the gratuity amount depends upon the tenure of service and last drawn salary. It is typically calculated according to this formula: 

Last drawn salary (basic salary plus dearness allowance) X number of completed years of service X 15/26. According to this formula, the time period of over six months or more is considered as one year. This means if you have completed five years and seven months of service, the number of years would be considered as six years for calculation of gratuity benefit. On the other hand, if the service period is five years and five months, for gratuity calculation it will be considered as five years.

An employer can however give higher gratuity than the amount under the prescribed formula. But the Gratuity Act outlines the minimum limit which is exempted from tax.

Other Things To Know About Gratuity Benefits


Gratuity is a benefit received by an employee for services rendered to an organisation. 

The Payment of Gratuity Act, 1972 applies to establishments employing 10 or more persons. 

The main purpose for enacting this Act is to provide social security to employees after retirement

"Considering the inflation and wage increase even in case of employees engaged in private sector, the government is of the view that the entitlement of gratuity should be revised for employees who are covered under the Payment of Gratuity Act, 1972," the government statement dated September 12 said. 


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