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    According to the gratuity act, every employer, who has 10 or more employees, has to follow the gratuity law. This law is applicable to government and private sector both.

    The meaning of gratuity is a ‘sum of money paid to an employee at the end of a period of employment.’ Gratuity also means a tip given for good service. But, In this case, we will refer to the first meaning.

    But you would get the gratuity only after completing at least 5 years in the service.  There are other rules of gratuity.

    Note, the condition of 5 years service has a small relaxation. In the last year, mere service of 240 days would be considered as one year. Hence, You would be eligible for the gratuity after 4 years and 240 days of continuous service.

    If are working in an organisation which works for 5 days in a week or less, mere 190 days would be counted as last one year. Therefore, in such case, you would be eligible for the gratuity after 4 years and 190 days.

    Continuous service means uninterrupted service. But, it does include the interruption due to, leave, sickness or accident. The strike, lay-off, or a lockout is also not considered as an interruption. Indeed, any interruption which is not due to the fault of the employee, would not be counted. But, if you have taken a sabbatical or leave without pay, then your service would get interrupted.

    An employee is entitled to get gratuity only after the termination of the employment. This termination may be of retirement, resignation or job switch. So, It is clear, you are not going to get gratuity while in the job.

    The minimum 5-year service rule is not applicable in case of death or disablement. The gratuity amount would be given to the nominee or legal heirs.

    The government fixes an upper limit for the gratuity. An employer is not bound to give gratuity beyond this limit. Also, the Tax exemption would not be available for the amount over and above this limit. As of now, the gratuity limit is ₹20 lakhs.

    Gratuity amount is totally tax-free. However, it should be given according to the prescribed gratuity formula. Any amount above this formula would be subject to the tax.

    An employer can give gratuity more than the prescribed formula. But the excess gratuity would be added to your taxable income.

    Every factory or establishment would pay gratuity to its employees. The gratuity rules are not mandatory for the factory or establishment which employs less than 10 persons. The number of employees would be counted as the average of the last 12 months.


    Gratuity Formula

    There is a gratuity formula for the payment. According to this formula, 15 days salary is given for every completed year. Since the number of days in the month is considered only 26, you will get 15/26 of your one-month salary for every completed year.

    This formula is dependent upon these two variables.

    a. Salary

    The salary includes basic pay, dearness allowances, and commission. The last drawn salary is considered for gratuity calculation. If the employee is a daily wage earner, the average of last 3-month wage is considered a one-day salary.

    b. Service Tenure

    The continuous duration of service. More than 6-month service in a year is calculated as one year.

    The Gratuity Formula

    Gratuity Amount = las drawn monthly Salary x Tenure of service in years x 15/26