Question 1

What is the formula for gratuity calculation?

Accepted Answer

For employees covered under the Payment of Gratuity Act 1972: Gratuity = (Basic + DA) × 15 / 26 × Years of Service. The '15' represents 15 days and '26' represents 26 working days per month. For employees not covered by the Act (smaller companies or different terms): Gratuity = (Basic + DA) × 15 / 30 × Years of Service, where 30 represents calendar days.

Question 2

What is the minimum years of service for gratuity?

Accepted Answer

An employee must complete at least 5 years of continuous service to be eligible for gratuity under the Payment of Gratuity Act. However, if an employee completes more than 6 months in their last year (i.e., works for 4 years and 7 months), many courts have ruled this should be treated as 5 years. In the unfortunate event of death or disablement, gratuity is paid regardless of the years of service.

Question 3

Is gratuity taxable in India?

Accepted Answer

Gratuity is exempt from income tax up to ₹20 lakh (₹20,00,000) for employees covered under the Payment of Gratuity Act. Government employees get full exemption. For employees not covered by the Act, the exempt amount is the least of: actual gratuity, last 10 months' average salary × half month per year of service, or ₹20 lakh. Any gratuity above the exempt limit is added to income and taxed at your applicable slab.

Question 4

When is gratuity paid to an employee?

Accepted Answer

Gratuity is payable when an employee: (1) superannuates (retires), (2) resigns after 5+ years of service, (3) is terminated (except for misconduct), or (4) dies or is disabled due to accident or illness (in which case it's paid to nominees regardless of years of service). The employer must pay gratuity within 30 days of it becoming payable. Delayed payment attracts simple interest at 10% per annum.

Question 5

Is employer's gratuity provision part of CTC?

Accepted Answer

Yes. In most large organizations, gratuity provision (approximately 4.81% of basic salary per year) is included in the CTC calculation. This is the cost the company sets aside for future gratuity payments. However, you only receive this amount after completing 5 years of service. Until then, it accumulates within the company or in a gratuity fund. This is why your actual take-home is less than your CTC.

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