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Gratuity Calculation & Gratuity Act, 1972: Complete Guide with Tax Calculator
What is Gratuity?
Gratuity is a lump sum payment made by an employer to an employee as a reward for long-term service. It is governed by the Payment of Gratuity Act, 1972 and is typically paid at retirement, resignation, or upon the employee’s death.
Understanding the Payment of Gratuity Act, 1972
The Payment of Gratuity Act, 1972 was enacted to provide financial benefits to employees who have served for a significant period. Here are the key provisions:
1. Applicability of the Act
- Applies to organizations with **10 or more employees**.
- Covers **factories, mines, plantations, shops, and commercial establishments**.
2. Eligibility Criteria
- An employee must complete **at least 5 years of continuous service**.
- Not required in cases of **death or permanent disability**.
3. Calculation Formula
Gratuity is calculated as:
Gratuity = (Last Drawn Salary × 15 × Years of Service) / 26
4. Employer Obligations
- Must pay gratuity **within 30 days** of an employee becoming eligible.
- Delayed payments attract **10% annual interest**.
5. Gratuity Forfeiture Rules
- Can be forfeited in cases of **misconduct, fraud, or criminal offense**.
- Partial forfeiture is allowed based on the severity of misconduct.
6. Recent Amendments
- **Tax-free gratuity limit increased to ₹20,00,000** for private sector employees.
- **Eligibility period remains 5 years**, but the Supreme Court clarified that **weekly off days count toward continuous service**.
Taxation of Gratuity
As per Section 10(10) of the Income Tax Act, gratuity is tax-exempt as follows:
- Government Employees: Fully exempt.
- Private Employees (Covered under Act): Exempt up to ₹20,00,000.
- Private Employees (Not Covered under Act): Exempt up to ₹10,00,000.
Interactive Gratuity & Tax Calculator
Gratuity Calculator
Calculate your gratuity amount as per the Payment of Gratuity Act, 1972. Know your rightful benefits after years of service.
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Your Gratuity Estimate
Important Information
This calculator provides an estimate of gratuity based on the Payment of Gratuity Act, 1972. The actual amount may vary depending on specific employment terms and conditions.
Key points to remember:
- Gratuity is payable after 5 years of continuous service (except in case of death or disablement)
- For employees covered under the Act: Gratuity = (Last drawn salary × 15/26) × Completed years of service
- Service period exceeding 6 months is rounded up to the next year
- The maximum gratuity amount payable under the Act is ₹20 lakh
- Gratuity received by government employees is fully exempt from tax
- For private sector employees, the least of the following is exempt: Actual gratuity, ₹20 lakh, or 15 days salary for each year of service
Eligibility
Minimum 5 years of continuous service with the same employer
Calculation
(Last salary × 15/26) × Completed years of service
Tax Exemption
Up to ₹20 lakh is exempt from income tax
Final Thoughts
The **Payment of Gratuity Act, 1972** ensures financial stability for employees after long service. Use the **interactive calculator** above to estimate your gratuity and tax liability.
