Gratuity payment calculations are governed by specific guidelines outlined in the Payment of Gratuity Act. (AI image)
Salaried employees quite often have gratuity as a component of their CTC (cost to company). The Payment of Gratuity Rules, 1972, stipulates that staff members become entitled to gratuity after completing five years of uninterrupted service with an organisation. But, did you know that you can qualify for gratuity payout before completing five years, provided they serve beyond a particular duration.
According to an ET report, experts say that employees qualify for gratuity upon completing 4 years and 240 days with an organisation. For example, if someone began working at an organisation on January 1, 2021, they would be eligible for gratuity upon leaving after August 29, 2025. This eligibility occurs because they would have served 4 years and 240 days by then, although their five-year milestone would only be completed by January 1, 2026.
This provision exists because of how continuous service is defined in the Payment of Gratuity Act.
Puneet Gupta, Tax Partner, EY India, told ET, “Section 4(1) of the Payment of Gratuity Act says that gratuity will be payable if an employee has rendered a minimum continuous service of five years. Section 2A of the Payment of Gratuity Act defines continuous service. Section 2A(2) of the Gratuity Act defines the deemed-to-be in continuous service. An employee is deemed to be in continuous service for one year if an employee during the 12 preceding calendar months has worked under the employer for not less than 190 days or 240 days, as the case may be.”
Also Read | Tax planning before March 31 deadline? Tax saving fixed deposits with high interest rates – check list
According to the Payment of Gratuity Act, employees working in underground mines or establishments operating fewer than six days weekly must complete 190 days, whilst others need 240 days. When an employee completes more than 240 days in the fifth year, they are considered to have completed an additional year of service, totalling five years, thus becoming eligible for gratuity.
Saraswathi Kasturirangan, Partner at Deloitte India explains that an employee on payroll becomes eligible for gratuity payment upon completing 4 years and 240 days of service when leaving the organisation. The 240-day period is equivalent to 7.89 months. Therefore, workers should ensure their tenure extends to 4 years and 8 months to qualify for gratuity benefits upon resignation or retirement, she says. Consequently, staff members whose continuous service falls short of 4 years and 240 days, for instance, those departing after 4 years and 6 months or 4 years, 6 months and 1 day, cannot claim gratuity benefits, she notes.
The requirement of five years’ continuous service is waived if the employee’s service ends due to death or disablement.
How is gratuity payment calculated? Formula explained
Gratuity payment calculations are governed by specific guidelines outlined in the Payment of Gratuity Act. The calculation method varies depending on whether employees fall under the Act’s purview or not.
Also Read | Gold prices at record high! Have yellow metal prices peaked? Check these 5 charts before putting more money in gold
The Act’s applicability is determined by the organisation’s workforce size. If an organisation has employed 10 or more people on any single day within the previous 12 calendar months, it comes under the Act’s jurisdiction. Once covered, the organisation remains subject to the Act even if staff numbers subsequently decrease below 10.
For staff members covered by the Payment of Gratuity Act, the payment is calculated using 15 days of their final drawn salary for each full year of service, including any period exceeding six months.
The calculation method is: (15X Final drawn salary X Service duration)/26
The final drawn salary encompasses basic pay, dearness allowance and sales commission, as stipulated in the Act.
Consider Miss X who has served an organisation (with a six-day work week) for 4 years and 300 days. Her eligibility for gratuity payment is confirmed as her service exceeds 4 years and 240 days. With a final basic salary of Rs 40,000, the 300 days convert to 9.863 months. For gratuity calculations, when excess months exceed 6 (9 months here), it counts as one complete year.
The computation would be: (15X40,000X5)/26.
The gratuity amount due to Mis X is Rs 1,15,384.61, rounded to Rs 1,15,385.
Also Read | New TDS rules from April 1, 2025: Check new tax deduction limits for FD interest, MFs and lottery wins
For staff not under the Payment of Gratuity Act’s purview:
Gratuity remains payable even when organisations aren’t covered by the Payment of Gratuity Act. In such instances, the gratuity is calculated as half a month’s salary per completed service year, disregarding any incomplete year (months less than a year) in the calculation.
The gratuity calculation follows this equation: (15 X Last drawn salary X Number of years of completed service)/30.
Consider a scenario where Mr X has served an organisation (not under the Act’s purview) for 6 years and 7 months. His final basic salary stands at Rs 40,000, and the organisation opts to provide him with gratuity.
The computation for his gratuity proceeds as: (15X40,000X6)/30.
The final gratuity amount that Mr X shall receive is Rs 1,20,000.
