What is Gratuity?

Gratuity is a financial benefit received by the salaried person from their employers for their long-term service. It is a token of appreciation for an employee’s dedication and hard work. In India, gratuity is regulated under the Payment of Gratuity Act, 1972. 

The amount of gratuity depends on the employee’s last drawn salary and the number of years they have served. It provides employees with financial security and is a significant component of retirement benefits.

Who is Eligible for Gratuity?

To be eligible for gratuity, an employee must meet the following criteria:

1. The employee must have completed at least five years of continuous service with the employer. 

2. Gratuity is payable when an employee:

• Retires or resigns. 
• Is terminated after completing the required period. 
• Passes away or becomes disabled due to illness or accident (in such cases, the five year condition is not applicable).

Taxability of Gratuity

The tax treatment of gratuity depends on whether the employee is a government or non-government employee.

1. For Government Employee 

• Gratuity is fully exempt from tax under Section 10 (10)(i) of the Income Tax Act. 
• Government employees do not need to worry about tax deductions on their gratuity amount.

2.For Non-Government Employee

Gratuity is partially exempt under Section 10(10)(ii) or Section (10)(iii) of the Income Tax Act. The amount of tax exempt is determined by following factors:

• The actual gratuity received. 
• Rs. 20,00,000 (maximum exemption limit for tax-free gratuity).
• The eligible gratuity amount calculated using the formula under the Payment of Gratuity Act. 

For any gratuity received beyond these limits, the excess amount is taxable and is added to the employee’s total income of the financial year. This is where a taxable gratuity calculator comes in handy to help calculate tax liability accurately. 

How is Gratuity Calculated?

The formula for gratuity calculation varies based on whether the employee is covered under the Payment of Gratuity Act or not.

For Employees Covered Under the Act: 

Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 26

Where, 

• Last drawn salary includes basic salary and dearness allowance (DA). 
• Years of service is the total period an employee has worked in the organization. 
• 15 represents the number of days in a month used for gratuity calculations. 
• 26 is the total number of working days in a month.

For Employees Not Covered Under the Act:

The formula is: 

Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 30

Here 30 is used instead of 26 because the Act doesn’t apply. 

Example Calculation: 

Suppose an employee worked for 10 years and 8 months in an organization with a last drawn salary of Rs 50,000. 

Please note working tenure round up the years of service exceeds 6 months. So 10 years and 8 months is counted as 11 years. 

Gratuity is (50,000 x 11x 15) /26 = Rs. 3,17,307

Or you can use our free Taxable Gratuity Calculator to find out the gratuity tax exemptions accurately without doing any math! 

How to Use the Chartered ONE’s Gratuity Calculator

Using our calculator is simple. Just follow simple steps: 

First, choose whether you are covered under the Gratuity Act or not. 

• Enter the basic pay and dearness allowance. 
• Input the number of years you have worked with the company. 
• Provide the total gratuity amount you have received or expect to receive. 
• The calculator will show the tax-exempt amount and the taxable amount based on your input details.

Advantages of Using Our Taxable Gratuity Calculator

Following are some of perks of using our gratuity calculator: 

• Saves time: You don’t need to manually apply the formula. 
• Accuracy: The calculator ensures you get an exact figure and avoids calculation errors.
• Easy to use: Our gratuity calculator is user-friendly and requires just basic inputs. 
• Financial Planning: Also helps you plan gratuity investments for tax benefits.