A Complete Guide About Gratuity and How to Calculate the Gratuity Payment?

Gratuity is basically a benefit in terms of money given by the organization to the employees. This award is given to the employee on the basis of the services rendered by him or her for a period of time. It is basically a lump sum amount that is given by the company usually at the time of retirement. In the Indian constitution, gratuity payment is mandatory and it comes under the payment of gratuity act 1972.

It is basically adopted by the government with the motive to secure the financial stability of the employees after they get retired. In March 2018, there were several amendments imposed on this law. Here in this article, we are going to provide some of the important details that will help you in understanding the concept of gratuity in deep.


Is this act applicable to everyone?

The act of ping gratuity is applicable to every factory whether it is port, shop, mine, oil field, plantation or any establishment having more than 10 employees. Here, it is important to notify that establishment includes all better covered under the shop and establishment act.

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Does every employee is eligible for the gratuity payment?

No, the employees who have rendered their services in a particular company for a period of 5 years or are only eligible to receive gratuity from the organization of the employers.

it is also important to note that in case the service of an employee gets terminated due to death or disability then the rule of continuous service in not be applicable and the company will still pay the gratuity to the employee or the family members.

What exactly the concept of continuous service is?


According to the law of gratuity is only payable to those employees who continuously and branded their services for a period of 5 years or more. while calculating the continuous service days, the organization also counts the days in which the employee does not attend the workshop due to accident, leave, lay off, lockout, strike, sickness or other. Simply, it can be stated that the day is mentioned above will be added while calculating the continuous service.

In case the employee is a woman then the maternity leaves a folded to her will be considered. includes is considered in accordance with the maternity benefit amendment act that can easily enhance the maternity leave from 12 weeks to 26 weeks. It can be stated that if women take maternity leave for around 26 weeks then it shall be considered or added to the service period.

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What is the Procedure and how is the Gratuity Payment Made?

As we have discussed the eligibility term and condition of the person to get the gratuity amount. Now, it is important for the employer to arrange the amount of gratuity within 30 days from the date of which it becomes payable. in case, the employee fails to provide the gratuity amount to the employee then and a simple interest gets in the post from the day on which the gratuity becomes payable.

What is the maximum amount of gratuity to be paid?

According to the law of the gratuity payment act, the maximum amount of gratuity payable is 20 lakh rupees. Earlier, according to the previous law, the amount was 10 lakh rupees but later on, after the amendments in the post, the amount increased especially for the employees engaged in the private sector.

Forfeiting of Gratuity:

The employee is having the rights to 4 feet the gratuity payable to the employee in the case, there is any sort of damage or loss that occurred to the organization due to the employee. Additionally, in case the employee conducts any sort of disorderly or acts of violence then also the employer is having the right regarding the forfeiture of gratuity.

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What is the Formula for Calculating the Gratuity?


Under the gratuity payment act, the amount of gratuity gets calculated by multiplying the last drawn salary with the number of years of service and 15/26. For information, you can also go ahead with the gratuity calculator.

Gratuity = last drawn salary* 15/26 * number of years of service.

For Example:

 If Rahul has worked in an organization for 26 years and her Last Drawn Salary is Rest. 1,80,000/- per month.

Gratuity payable to Rahul will be = 1, 80,000 x 15/26 x 26

= 2, 70,000/-

Sometimes it happens that the amount of gratuity payable to the employee exceeds the limit of 20 lakh rupees. In such a situation also, the employee will receive 20 lakh rupees only as this is the maximum amount stipulated under the act.

Tax Exemptions:

As it is stated that the gratuity amount is provided as social security to the employees but still it is exempted from the taxable income. This statement is given under the income tax act 1961 section 10 (10). Additionally, this exemption is only limited up to a maximum amount of of20 lakh. In case due to any event of cause, the amount of gratuity exceeds the amount of 2000000 then it will be taxable.

For example, if Rahul gets an amount of 25 lakh rupees as gratuity then only 20 lacs shelter exempted from income tax while on the other five lacs, the taxes will be imposed.

What are the consequences of non-compliance with the gratuity law?

In case any sort of failure gets complied with on the provision of the gratuity act then it will lead towards imprisonment up to 1 year along with the penalty of more than 20000 rupees.


Hence, all about the gratuity payment and the app. with the help of the above-given information, it will be easier for all of you to understand the whole concept of gratuity and at the time of your retirement, you will be able to avail the benefits. This is only composed by the government with the motive to provide you financial security at the time of retirement. Additionally, you should determine the fact that the company will only provide you the gratuity amount up to Rupees 20 lacs. Hence in case, the amounts exceed then there is no law implied on the organization that can force t to pay the same.

Author: Naveen EThis is E.Naveen Kumar full time Content Writer, SEO, Digital marketing Expert, founder of financesrule.com. Really enjoying playing cricket at free times. Being a Btech Graduation from Computer Science stream Selected full-time blogging as my Profession.

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