Gratuity Calculation & Taxation: Complete Guide to the Gratuity Act, 1972 with Tax-Free Limit & Online

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

Enter Last Drawn Salary (₹): Enter Years of Service: Select Your Employer Type: Government Employee Private Sector (Covered under Gratuity Act) Private Sector (Not Covered under Act)

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.