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How is Gratuity Calculated and Is it Tax-Free?

Gratuity so payable is given to the employee when he/she fulfils the criteria of continued service for 5 years or more for superannuation or retires or resigns and in case an employee dies or develops some disability owing to accident or illness, the amount of Gratuity is payable regardless of tenure.

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Updated:September 14, 2017, 5:59 PM IST
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How is Gratuity Calculated and Is it Tax-Free?
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Gratuity is one of the benefits that an employee is entitled to at the time of his retirement and is being paid as a lump sum amount of money that incurs from the employer’s funds. The provisions pertaining to gratuity are covered under the Payment of Gratuity Act, 1972.

Under this act, gratuity is available to all employees who are working in any office which have at least 10 or more than ten employees and includes factories, mines, oilfields, plantations, ports, railway companies, shops, etc. Gratuity is payable to only permanent employees.

However, the only pre-requisite to claim gratuity is that the employee should have been wor Gratuity Calculated king for the employer for a period of minimum 5 years but excludes those cases where the employee has died or has developed a disability owing to accident or illness. Gratuity so payable is given to the employee when he/she fulfils the criteria of continued service for 5 years or more for superannuation or retires or resigns and in case an employee dies or develops some disability owing to accident or illness, the amount of Gratuity is payable regardless of tenure. The amount of gratuity is paid to the employee within 30 days from the date of being issued to the person entitled to it. In case, there is any delay or default the employer will have to pay interest on such amount.

How to Calculate Gratuity?

Gratuity is calculated by using the following formula –

Gratuity = Last Drawn Salary (Basic + DA) × 15/26 × No. of Years of Service (rounded off to the full year)
Where 15/26 = 15 working days out of a total of 26 per month

In case that it is proved that the employees’ services were terminated on the grounds of moral turpitude in the course of official business or any proved misconduct on the employees’ part, will lead to the forfeiture of his gratuity amount absolutely.

Gratuity is not entirely tax free but a certain amount is exempted from tax. Earlier, in April 2010 such exempted amount was ₹3.5 Lakhs, but then was increased to ₹10 lakhs. According to this, despite having stashed an amount greater than ₹10 Lakhs as gratuity, the amount of tax-free withdrawal cannot exceed ₹10 Lakhs after which the taxes are deducted from the remaining amount, and the amount that is (if) left after deduction of taxes is paid to you under the head ‘Income from Salaries’.

However, the Payment of Gratuity (Amendment) Bill, 2017 is all set to be introduced in the Parliament and aims at increasing this exempted amount to ₹20 Lakhs tax free gratuity from the total amount of gratuity which means that now only that gratuity amount will be subject to taxes that exceeds ₹20 Lakhs which will result in the employees pocketing a higher amount of gratuity.

The Tax-exemption on Gratuity is calculated on the lowest amount from this three:< /strong>

1. Upper Limit of Tax-Free Gratuity

2. Actual Gratuity Received

3. Gratuity Calculated as per the Formula: Gratuity = Last Drawn Salary (Basic + DA) × 15/26 × No. of Years of Service (rounded off to the full year)

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