Gratuity Formula & Calculation
Gratuity is a type of payment made by the employer to an employee for long services rendered by him. Gratuity may be received by an employee on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment. Gratuity received by Central and State Government Employees are fully exempt from Income Tax. Gratuity received by private sector employees are exempt from Income Tax for upto Rs.10 lakhs.
You can use the following formulas to calculate gratuity in India:
Private Employees covered under the Payment of Gratuity Act, 1972
For private sector employees covered under the Payment of Gratuity Act, 1972, gratuity is calculated using the following formula:
Formula: Salary at the time of retirement ÷ 26 × 15 × Completed year of service.
While calculating completed year of service, if part of the month is more than 6 months, then round off higher. For example, if the duration of service is 18 years 7 months. Completed year of service will be 19 years. If the duration of service is 18 years 6 months. Then, completed years of service will be 18 years.
Private Employees Receiving Gratuity as per Employment Contract
For private sector employees receiving gratuity as per terms of employment (not covered under the Payment of Gratuity Act, 1972), the following formula can be used for calculating gratuity:
Formula: Average salary ÷ 30 × 15 × Completed year of service.
While calculating average salary, compute the average salary of last 10 months immediately preceding the month of retirement. Also, as discussed above, while calculating completed years of service, ignore the part of months.
Income Tax Exemption for Gratuity
Any amount of gratuity received by Central and State Government Employees including Defence personnel is fully exempt from Income Tax. On the other hand, private sector employees enjoy a maximum life-time exemption of Rs.10 lakhs per annum or the actual amount received. If the gratuity is received from one or more employers, the maximum amount of exemption can still not exceed the maximum limit of Rs. 10,00,000.
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