If I quit my job now how much gratuity can I get?

Everyone would have heard about Gratuity. It is a lump sum payment made by the employer to an employee in appreciation of the past services rendered by the employee.

Payment of gratuity is governed by the Payment of Gratuity Act, 1972. This Act provides for a scheme for the payment of  gratuity to employees engaged in factories, mines, oil fields, plantations, ports, railway companies, shops or other establishments in which 10 or more employees are employed.

Who are eligible for gratuity?

Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years,—

(a) On his superannuation, or

(b) On his retirement or resignation or,

(c) On his death or disablement due to accident or disease: (in this case, 5 years of service is not necessary)

How to compute gratuity? For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days’ wages based on last drawn salary by the employee. (For example, if an employee quits the job after completing 5 year and 6 months, he will be eligible to get gratuity for 6 years)

Explanation — the fifteen days’ wages shall be calculated by dividing the monthly salary (means Basic plus DA, not the whole salary) last drawn by twenty-six days (and not thirty days) and multiplying the quotient by fifteen i.e. 15 * Last drawn Basic plus DA/26.

For example: If the last drawn salary is, say, Rs. 50,000 and the period of service is, 25 years and 7 months, the gratuity payable will be Rs. 7,50,000 (Rs. 50,000 x 15/26 x 26 years)

Please also note that the amount of gratuity payable to an employee shall not exceed Rs.10 Lakhs. (Means if the gratuity payable is 12 Lakhs; it is restricted to Rs.10 Lakhs)

Whether gratuity is taxable?

As per Section 17 of the Income tax Act, Salary includes gratuity. The tax shall be paid on salaries which includes gratuity. However, Gratuity with certain limit is exempt under Section 10 (10) of the Act.

Gratuity received by the employee is taxable under the head “Salary”. Whereas gratuity received by the legal heir of the deceased employee shall be taxable under the head “income from other sources”. For both the cases section 10(10) provides exemption up to a certain limit.

Exemption is as under:

• In case of Government employees gratuity received is fully exempt.
• In case of companies covered under gratuity act, the least of (a) actual gratuity received (b) Rs.10 Lakhs (c) Last drawn salary X 15/26 X Completed years of service or part thereof exceeding 6 months exempt.
• In case of other employees, the least of (a) actual gratuity received (b) Average of Last 10 months salary X 15/30 X Completed years of service (c) Rs.10 Lakhs

Another Important Point –

• Where an employee had received gratuity in any earlier years and had claimed exemption under section 10(10) he still shall be entitled to this exemption but the limit of Rs. 10 Lakhs is reduced by the amount of exemption availed in earlier years.

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