Gratuity Eligibility Before and After Completion of 5 Years

How is Gratuity Calculated?

Let us understand the gratuity calculation with a simple example:

Ravi is an MNC employee. His last drawn salary in a month is ₹1,50,000, which includes both his basic pay and Dearness Allowance (DA). He has worked for the company for 5 years.

His gratuity calculation will be as follows: 

• Gratuity = (1,50,000 × 5 × 15) / 26

• Gratuity = ₹4,32,692

Can an Employee Receive Gratuity Before 5 Years?

Employees who leave an organization after approximately 4 or 4.5 years often inquire about their eligibility for gratuity. Generally, employees in India must complete five years of continuous service to qualify for gratuity. However, there are specific situations where gratuity can be received before reaching five years:

• Death of the Employee: If an employee passes away, gratuity is payable to their nominee or legal heir, regardless of the duration of service.

• Disability: If an employee becomes disabled due to an accident or illness, they can also claim gratuity before completing five years.

In most cases, if an employee resigns or is terminated before completing five years of service, they will not be eligible for gratuity.

Conditions Governing 5 Years of Continuous Service

The conditions governing 5 years of continuous service for gratuity are as follows:

• Eligibility for Benefits: Employees must complete 5 consecutive years of service with the same employer to be eligible for certain benefits.

• Leave: Employees should not have more than 30 days of leave (except casual leave) during this period for the service to remain continuous.

• Absence: Unauthorised or prolonged absences (e.g., without leave) may break the continuity of service.

• Transfer of Service: If transferred to another unit under the same employer, it is still considered continuous service.

• Public Holidays: Periods of public holidays, paid sick leave, or annual leave are included in the calculation of continuous service.

• Termination or Resignation: If an employee resigns or is terminated before completing 5 years, the continuity is considered broken.

What are the Recent Updates in the Gratuity Act?

The recent updates in the gratuity rules are as follows: 

• Increased Gratuity Limit: The gratuity cap for central government employees has been raised to Rs 25 lakh from the previous Rs 20 lakh as of January 1, 2024. This adjustment aligns with a 50% increase in the dearness allowance (DA).

• Eligibility Criteria: Employees must complete a minimum of five years of continuous service to qualify for gratuity payments. This applies to employees in both government and private sectors.

• Claim Process:

  • Employees must submit a formal application using Form I to initiate their gratuity claim.

  • Employers are responsible for verifying claims and calculating the gratuity amount promptly.

  • Gratuity must be paid within 30 days of it becoming due. Failure to do so incurs interest on the amount owed.

• Dispute Resolution: If disputes arise regarding gratuity amounts or eligibility, employees can appeal to the controlling authority by submitting an application in Form N.

What are the Tax Rules for Gratuity?

Following are the tax benefits offered under Gratuity Act: 

• Gratuity Tax Status: Gratuity is classified as part of your income and is taxable under the 'Salaries' section of the Income Tax Act.

• Updated Tax Exemption Limit: You can claim an exemption on gratuity up to ₹25 lakh. If your total gratuity (from all employers) is below this limit, it is not subject to tax.

• Government Employees: Gratuity received by government employees remains fully exempt from tax, irrespective of the amount received.

• Private Sector Employees: The tax exemption for private sector employees depends on their coverage under the Payment of Gratuity Act, 1972:

  • Covered Under the Act: The exemption is the least of the following: Actual gratuity received

  • Not Covered Under the Act: The exemption is the least of: Actual gratuity received

Conclusion

Gratuity in India is an important benefit for employees, ensuring financial security upon retirement or resignation after continuous service. Under the Payment of Gratuity Act, 1972, employees are entitled to receive gratuity after completing 5 years of continuous service with an employer. The amount is calculated based on the last drawn salary and years of service. With the latest amendments, the maximum limit for gratuity has been raised to ₹25 lakh, offering better financial support to employees.