Gratuity is calculated as 15 day’s salary for each completed year of service. The salary includes your last drawn basic salary and dearness allowance but excludes all other allowances.
The formula for calculating gratuity is- Last drawn salary (basic salary plus dearness allowance) X number of completed years of service X 15/26. The tenure for which the service is rendered is based on whether the firm is covered under the gratuity act or not.
Now, since the limit has been increased to Rs. 20 lakh, the least of the above will be – 11,53,846 and the employee will be liable to pay tax on the only balance of Rs. 46,000.
- Are Contractual employees also entitled for gratuity?
In case, if you are receiving the gratuity from two or more employers in the same year then the exemption limit will stay the same.If the gratuity is received from a former employer and another employer thereafter, the limit of exemption will be reduced by the exemption limit taken earlier.
No, this benefit is only for those on the company’s regular payroll. No gratuity is granted to contractual employees.
In case of the organization is covered under the Act, the employee’s service tenure will be considered for a full year provided he has worked for more than six months but less than a year. In case if the organisation is not covered under the Act then the tenure of the employee whose services exceeds six months but is less than a year will not be considered as full year.
For instance, if the employee has worked in an organisation for 20 years, six months and one day. In this case, the tenure of his services will be considered as 21 years. In case if the organization was not covered under the Act, then the employee’s tenure will be taken as only 20 years.
The cabinet has approved the bill seeking to raise tax-exempt gratuity limit to Rs 20 lakh from the current level of Rs 10 lakh. This brings cheers to those employees who are not covered under the Central Civil Services (Pension) Rules, as private sector employees, public undertakings, and employees.
The gratuity received by government employees is exempted and is not required to pay tax. For a non-governmental employee, the gratuity received in his entire working life is tax-free up to maximum limit of Rs. 10 lakh.
- Calculation of gratuity exempted from tax-
Maximum exemption 10 lakh before the amendment.
Let’s say a person is covered under the gratuity act. He has completed his service for 20 years and four months. He received 12 lakhs as gratuity from the organisation and his last drawn salary is Rs.1 lakh. How much of this gratuity will be tax exempted?
As per the Act, the least of the following is exempted-
- Tax-free limit -Rs.10 lakh
- Actual gratuity received- Rs. 12 lakh
- 15 days salary on the basis of last drawn salary- 15*20*1/ 26 = 11, 53, 846
Therefore, in this case, the tax exempted gratuity will be actual minus least of the above, i.e. Rs. 10 lakh. On the balance Rs, 2 lakh, the employee will be liable to pay tax as per his tax slab.