Besides the salary compensation, employers provide employee wellness benefits as well as additional payments to their employees. One such payment that employers are required to offer is gratuity. Let’s understand what gratuity is all about.

What is gratuity?

Gratuity is a type of lump-sum payment made to employees to recognise their loyalty and efforts towards the organisation. Gratuity payment is dictated by the Payment of Gratuity Act, 1972 and is mandated to be paid to employees who have completed at least 5 years in the organisation. The gratuity payment is usually made when the employee leaves service or upon retirement. However, in some cases, gratuity can be paid even earlier.

What is a gratuity calculator?

The amount of gratuity payable to an employee is calculated using a specific formula. The formula is mathematical in nature and in the case of organisations with a large number of employees, calculating gratuity amount for each employee can be a cumbersome process.

This is where a gratuity calculator comes into the picture. A gratuity calculator is an online tool that helps you calculate the eligible amount of gratuity that you are entitled to receive. The calculator is an error-free way of determining the gratuity amount and is, therefore, convenient to use.

How does the payment of gratuity work?

Gratuity forms a part of the gross salary of an employee. It is paid by the employer either out of its own pockets or through an insurance contract taken out with a company. Insurance companies provide group gratuity policies that cover the legal liability of gratuity payment. Employers usually buy these gratuity plans to avoid the financial strain of making lump-sum payments to employees on an ad hoc basis. 

When employees fulfil the eligibility criteria of availing gratuity, the gratuity payment is done. For calculating gratuity employers either use the mathematical formula or using the online gratuity calculator for ease and convenience. 

Eligibility criteria for receiving a gratuity

To be eligible for receiving a gratuity, employees should fulfil the below-mentioned criteria –

  • The employee should be eligible for superannuation
  • The employee should have retired from active employment
  • The employee should have resigned from the organisation after working for at least 5 years
  • If the employee dies or becomes disabled, gratuity can be paid early rather than being payable on retirement or resignation

How is gratuity calculated?

The formula for calculating gratuity depends on whether you are covered under the Payment of Gratuity Act, 1972 or not. Two different formulae are used for calculating gratuity payable to employees covered under the Act and those that are not covered under the Act. The formulae are as follows –

  • If the organisation is covered under the Payment of Gratuity Act, 1972

    If the organisation falls under the purview of the Payment of Gratuity Act, 1972, the formula for calculating gratuity would be as follows –

    (15 * last drawn salary * working tenure) / 26

    The last drawn salary would be considered as the monthly salary. The working tenure would be the number of years working with an organisation. It would be a whole number and rounded off to the nearest year.

    For example, here’s how much gratuity Mr Sharma would get if he is covered under the Act –

    Total working tenure 

    15 years 4 months

    Rounded-off to 15 years 

    Last drawn salary

    INR 45,000 per month

    Gratuity receivable 

    (15 * 45,000 * 15) / 26

    = INR 389,423 (rounded-off) 

  • If the organisation is not covered under the Payment of Gratuity Act, 1972

    If the organisation is not covered under the Act, the gratuity calculation formula would change. It would, thus, be calculated using the following formula –

    (15 * last drawn salary * working tenure) / 30

    Here also, the last drawn monthly salary would be considered and the working tenure would be the total number of years rounded off to the nearest year.

    For example, if Mr Sharma was not covered under the Payment of Gratuity Act, 1972, the gratuity calculation would be as follows –

    Total working tenure 

    15 years 4 months

    Rounded-off to 15 years 

    Last drawn salary

    INR 45,000 per month

    Gratuity receivable 

    (15 * 45,000 * 15) / 30

    = INR 337,500 (rounded-off) 

  • If the employee dies

    On the death of the employee, the gratuity payment does not depend on whether or not the employee was covered under the Act. In such cases, the payment depends on the total length of service of the employee. Here’s how much gratuity is paid in the case of death of the employee –

    Total working tenure

    Rate of gratuity payable

    Less than a year

    2 times the basic salary

    More than a year but less than 5 years

    6 times the basic salary

    More than 5 years but less than 11 years

    12 times the basic salary

    More than 11 years but less than 20 years

    20 times the basic salary

    20 years and above

    50% of the basic salary earned in each completed block of 6 months subject to a maximum of 33 blocks

  • Moreover, the maximum gratuity amount is limited to INR 20 lakhs. 

    So, for example, if an employee, who had worked for 6 years 7 months earning INR 50,000 per month, dies, the gratuity that his nominee would receive would be calculated as follows –

    Gratuity payable = 12 times the basic salary = 12*50,000 = INR 600,000

Gratuity forms

There are a host of forms associated with the different aspects of gratuity payment. These forms have been specified as per the various rules mentioned in the Payment of Gratuity Act, 1972. The list of the applicable gratuity forms are as follows –

Gratuity form

Rule under which the form is applicable

Name of the form

Form A

Rule 3 (1)

Notice of Opening 

Form B

Rule 3 (2)

Notice of Change

Form C

Rule 3 (3)

Notice of Closure

Form D

Rule 5 (1)

Notice for Excluding Husband from Family

Form E

Rule 5 (2)

Notice of Withdrawal of Notice for Excluding Husband from Family

Form F

Rule 6 (1)

Nomination

Form G

Rule 6 (3)

Fresh Nomination

Form H

Rule 6 (4)

Modification of Nomination

Form I

Rule 7 (1)

Application of Gratuity by an Employee

Form J

Rule 7 (2)

Application for Gratuity by a Nominee

Form K

Rule 7 (3)

Application for Gratuity by a Legal Heir

Form L

Rule 8 (1) (i)

Notice for Payment of Gratuity

Form M

Rule 8 (1) (ii)

Notice Rejecting Claim for Payment of Gratuity

Form N

Rule 10 (1)

Application for Direction to Controlling Authority

Form O

Rule 11 (1)

Notice for Appearance Before the Controlling Authority

Form P

Rule 14

Summons to Appear Before Controlling Authority

Form Q

Rule 16 (1)

Particulars of Application under Section 16

Form R

Rule 17

Notice for Payment of Gratuity

Form S

Rule 18 (8)

Notice for Payment of Gratuity as Determined by Appellate Authority

Form T

Rule 19

Application for Recovery of Gratuity

Form U

Rule 20

Abstract of the Act and Rules

Latest changes in gratuity rules

The Government keeps making changes to the Gratuity Act and Rules so that the gratuity payment is relevant with the changing times. As such, the Government has made some changes in the gratuity payment. These changes are as follows –

  • According to the new Wage Code Bill 2021 which is expected to be implemented from October 2021, the wages of the employees are expected to change. It would be at least 50% of the total salary of the employee. As the wages increase, the basic salary of the employees would increase. This would also increase the gratuity payment which depends on the basic pay.
  • Moreover, it is expected that the new Bill would reduce the eligible gratuity period to 1 or 3 years. So, employees working for 1 year or 3 years with the same employer would become eligible to receive gratuity instead of the present tenure of 5 years.

Tax implication of gratuity

The tax implication on the gratuity amount received depends on the type of employee who receives the amount. It is calculated as follows –

  • In the case of a Government employee, the entire amount of gratuity received is considered as a tax-free income. The gratuity amount is, therefore, tax-free. The employee can be employed with the local Government, State Government or Central Government to enjoy this tax benefit. The gratuity received on either superannuation or death of the employee would be a tax-free benefit.
  • In the case of employees working in the private sector, whether or not, covered under the Payment of Gratuity Act, 1972, the amount of gratuity that is exempted from tax is the lowest of the following –
  • The actual amount of gratuity received from the employer
  • The eligible amount of gratuity is calculated using the gratuity formula
  • INR 20 lakhs

For example, consider the following scenario assuming the employee is covered under the Payment of Gratuity Act, 1972 –

Last drawn salary

INR 80,000 per month

Tenure of service 

9 years 8 months

= 10 years (rounded off to the nearest year)

Eligible gratuity amount 

(15*10*80,000) / 26

= INR 461,538 (rounded-off to the nearest rupee)

Maximum tax exemption limit

INR 20 lakhs

Actual gratuity received 

INR 5 lakhs

Tax-free gratuity amount

INR 461,538

Taxable gratuity amount

INR 5 lakhs – INR 461,538

= INR 38,462

If, however, the employee is not covered under the Payment of Gratuity Act, 1972, the exemption limit calculation would be as follows –

Last drawn salary

INR 80,000 per month

Tenure of service 

9 years 8 months

= 10 years (rounded off to the nearest year)

Eligible gratuity amount 

(15*10*80,000) / 26

= INR 4 lakhs

Maximum tax exemption limit

INR 20 lakhs

Actual gratuity received 

INR 5 lakhs

Tax-free gratuity amount

INR 4 lakhs

Taxable gratuity amount

INR 5 lakhs – INR 4 lakhs

= INR 1 lakh

Since the actual gratuity received is higher than the eligible amount of gratuity, exemption would be allowed only on the lowest amount, i.e. the eligible amount of gratuity. The rest, i.e. the gratuity received less the eligible amount (INR 38,462 or INR 1 lakh) would be taxed in your hands at your income tax slab rates.

Rules and regulations pertaining to gratuity

There are specific rules and regulations with regards to gratuity payment that you should keep in mind. These rules and regulations are as follows –

  • If the employee is fired or sacked from his job, the employer can reject the payment of gratuity even when the employee is eligible for the same.
  • If the gratuity amount paid by the employer is more than the eligible amount of gratuity that the employee is entitled to receive, the excess gratuity paid by the employer would be taxable in the hands of the employee.
  • If the employee dies, the gratuity would be paid to the nominee or the legal heir. In such cases, the applicable taxation of the gratuity amount would be in the hands of the nominee or legal heir, as the case may be. 

Alternative ways to save taxes

Though the eligible amount of gratuity received from your employer is a tax-free income, you might incur a tax liability if your employer pays a higher amount of gratuity than you are eligible to receive. So, to reduce your tax liability, here are some ways in which you can save taxes –

  • Invest in a life insurance policy. The premiums paid are allowed as a deduction under Section 80C up to INR 1.5 lakhs. Moreover, the benefits that you receive are also tax-free under Section 10(10D) of the Income Tax Act, 1961.
  • Invest in a health insurance policy. Its premiums are also allowed as a tax-deductible expense. You can claim a deduction of INR 25,000 if you are below 60 years or age or INR 50,000 if you are a senior citizen. Moreover, you can claim an additional deduction of up to INR 25,000 or INR 50,000 if you buy a policy for your parents.
  • Use a home loan to buy your dream home. The principal repaid for the loan is allowed as a deduction under Section 8C. The interest payments, on the other hand, are allowed as exemptions under Section 24(b) and Section 80 EEA.
  • The saving account interest earned is allowed as a deduction under Section 80 TTA. The limit is INR 10,000.
  • Invest in an ELSS scheme. The investment is allowed as a deduction under Section 80C up to INR 1.5 lakhs.

So, understand gratuity meaning and how it is calculated. Also, understand the tax implication so that you know how to file your taxes correctly.


FAQ’s

Gratuity is payable only if you are on the payroll of the company. If you are a freelancer, you are not an employed individual. As such, you would not be liable to receive gratuity.


Yes, gratuity payment would be made to you even if your employer winds up its business. Gratuity is a mandatory payment which employers cannot forfeit if the employee is eligible for the same.


No, the nomination is not mandatory under gratuity. However, when you make a nomination, it becomes easy to pay the gratuity to the nominee. In the absence of a nomination, gratuity becomes payable to legal heirs who have to prove their identity with the help of a succession certificate. This is a rather cumbersome process and might take time.


Gratuity is payable in the following instances –

  • When the employee dies
  • When the employee resigns after, at least, 5 years of continuous service
  • When the employee opts for Voluntary Retirement (VRS) after, at least, 5 years of continuous service
  • When the employee becomes disabled due to an accident or a disability
  • In the case of retrenchment or layoffs

No, you can claim tax exemption only on the lowest of the following amounts –

  • INR 20 lakhs
  • The eligible amount using the specified formula for calculating gratuity
  • The actual amount of gratuity received from the employer

Any gratuity received in excess of the afore-mentioned amount would be subject to tax at your income tax slab rates. However, if you are a Government employee, the whole amount of gratuity that you receive would be tax-free in your hands.