Understanding Gratuity Rules and Regulations in India

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Understanding gratuity rules and regulations in India is crucial for both employees and employers, as it directly impacts retirement benefits. Gratuity is a lump sum payment made by an employer to an employee as a token of appreciation for their services, and it is governed by the Payment of Gratuity Act, 1972. Gratuity calculation is an essential aspect of this process, determining how much an employee is entitled to upon leaving the organization.

Here are five key points to understand about gratuity calculation:

  1. Eligibility Criteria: To be eligible for gratuity, an employee must have completed at least five years of continuous service with the same employer. The only exception to this rule is if the employee’s service ends due to death or disability.

  2. Gratuity Formula: The standard gratuity calculation formula is: Gratuity = (Last drawn salary × 15 × number of years of service) ÷ 26. The last drawn salary includes basic salary and dearness allowance, and the factor 26 represents the number of working days in a month.

  3. Taxation: Gratuity is exempt from tax up to a certain limit. As of the current regulations, the maximum tax-free gratuity amount is ₹20 lakh. Any amount exceeding this limit is subject to taxation according to the employee’s income tax slab.

  4. Applicability: The Payment of Gratuity Act applies to all organizations with ten or more employees. It covers factories, mines, oilfields, plantations, ports, railway companies, shops, and other establishments.

  5. Gratuity Calculation for Different Scenarios: The gratuity calculation may vary depending on the employment scenario, such as retirement, resignation, or death. In the case of death, the gratuity is paid to the employee’s nominee or legal heir, and the service period is rounded up to the nearest year.

Understanding the nuances of gratuity calculation ensures that both employees and employers can handle gratuity payments fairly and accurately, aligning with the regulations set forth by the Indian government.


Location: India

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