Can Employers Pay More Than 3.5 Lakhs in Gratuity? Exploring Limits and Possibilities

The maximum limit of Gratuity is 3.5 lakhs. Can the employer decide to give 24 months of basic salary of 75,000/- which works out to Rs. 18 Lakhs? Is there any restriction on Gratuity to only 3.5 lakhs? If not, what is the maximum limit which the employer can decide to pay.

Dear Rajbal,

The employer can give gratuity of more than Rs. 3.50 lakhs as provided in income tax rules. However, the income tax exemption is up to Rs. 3.50 lakhs.

Regards,
Bhushan

Hi friends,

I would like to share the following with regards to the Payment of Gratuity Act.

The gratuity is payable to employees who have rendered 5 or more years of continuous service. Even an employee who has served 4 years and 240 days of the 5th year is eligible for Gratuity.

The calculation for Gratuity should be done in the following method: Last drawn basic salary x 15 days / 26 days x number of years. If you have an employee who has completed, say, 5 years and 4 months, then instead of taking the number of years, just put = 64 months / 12 months. Whatever the figure is, the Gratuity amount payable to the employee.

The ceiling amount laid by the Act is 3.5 lakhs. The act clearly states that if there are better provisions of the Gratuity Act laid by the Company, then that should prevail over the Act. It means if an employee is eligible for more than 3.5 lakhs and the Company has a better policy to pay more than 3.5 lakhs, then the Company can do so for the benefit of the employee.

Regards, Anjali Tejani

Hi Anjali,

As per the act, the employee should complete 5 years of continuous service in one company. If an employee completes 4 years and 240 days or 4 years 10 months and resigns, he/she is not entitled to gratuity. If an employee completes 5 years 6 months, then in this case, he/she is entitled to gratuity for 6 years. If the employee's gratuity is included in CTC, then even if he completes 6 months, 1 year, or 4 years and 240 days, then gratuity is paid for that completed period only.

Regards,
Nimish Joshi

Hi Anjali/Nimish,

Those were good updates posted by you. However, I am of the opinion that even if the amount is included in CTC, it is not payable until a person completes 5 years of continuous service. I request more clarity on this. Can anyone cite any provisions under the said act or any case law that states continuous service of 4 years and 240 days makes you eligible for gratuity.

Hi,

When the statute states that the maximum limit for gratuity payment is 3.5 lakhs, even if the actual gratuity calculation exceeds 3.5 lakhs, the employer's liability is limited to 3.5 lakhs.

Maheswara Rao
09848308694

Hi friends,

I have a further update on this topic. As mentioned earlier, the ceiling amount set by the Act is 3.5 lakhs. The act clearly states that if the Company has better provisions under the Gratuity Act, those provisions should take precedence over the Act.

For example, if an employee is eligible for a gratuity amount of 4 lakhs, the employer's liability as per the act is 3.5 lakhs to pay the gratuity amount. However, if the employer has better provisions than the act and wishes to pay 4 lakhs as gratuity, they can do so.

Furthermore, there is no tax liability on gratuity up to 3.5 lakhs. The employee would be required to pay taxes on the amount exceeding the 3.5 lakhs ceiling.

Regards,
Anjali

Dear Friend,

Kindly note that presently there is no upper limit for gratuity.

Regards,
Subhabrata Dasgupta

Dear Anjali,

Gratuity is not paid to employees who have completed 4 years and 240 days. Just check it out. I may be wrong.

Regards,
Nimish Joshi
9969526325
02525-271113

Dear Sir/Madam,

There is no limit to the amount of Gratuity payable to employees.

Regards,
Subhabrata Dasgupta

Hi,

The law states clearly: "Gratuity is paid to all such employees after their resignation or retirement. In case of resignation, gratuity is paid to employees who have completed 5 years of service."

The amount of gratuity may differ from management to management. There is no ceiling on the maximum amount to be given.

Calculation of Gratuity payment as per the IT Act is as follows:

Half the month Basic + DA (i.e., consider last month's salary) * number of years of service.

To help you better understand, let me explain with an illustration:

Example: Mr. A, an employee, completed 30 years and 10 months of service. At the time of retirement, he received Rs. 3,60,000 as gratuity, and his last month's basic + DA was Rs. 18,000.

18000/2 = 9000
For 31 years, it is 9000 * 31 = 2,79,000

However, the management paid Rs. 3,60,000 to this employee.

Exemption of Gratuity as per the IT Act:

Amount of Gratuity as per Calculation or Rs. 3,50,000, whichever is less.

In this case:

Amount of Gratuity received: Rs. 3,60,000
(-) Gratuity Exempted: Rs. 2,79,000

Taxable Gratuity is Rs. 81,000. This amount of taxable gratuity, Rs. 81,000, will be added to his total salary in Form 16.

I hope this gives you a better understanding of Gratuity.

Thanks & Regards,

Jai
HR Manager
9963692016

Thanks for the input.

For employees who have less than 5 years of service in the organization, gratuity amount is given to them as cash in hand in the form of a special amount.

Please correct me if I am wrong.

Hello to all,

There is another dimension in gratuity; it is not mandatory for an employer to pay gratuity to the person who is terminated because of misconduct or any misappropriation.

Regards,
Sandeep K.

Dear Maheswara Rao,

I beg to differ with you. Whatever maximum limit you are referring to is in an IT context. There is no upper ceiling on the payment of gratuity amount. Please do correct me if I am wrong.

Regards,
Jai

Hi Friends,

I would like to know how we add Gratuity to the Cost to Company (CTC). Is there a specific percentage of the basic amount that needs to be included in the CTC? Can anybody clarify this for me?

Thanks,
Tushar

Hi,

Please be informed that there is no upper limit for gratuity as discussed in this forum.

There is just a non-taxable limit of 3.5 lakhs; anything above 3.5 will be taxed by the IT department. However, the government of India or any of the acts governing industries or commercial establishments have not put a limit on the amount of gratuity provided to the employee.

Also, be informed that any part mentioned as CTC is due from the company to the employee. Hence, when an employee leaves the job before five years and contests for the gratuity amount, the company will have to pay them the same. The gratuity amount is included in the CTC for two reasons: it's a tax-saving instrument for the companies, and secondly, the CTC amount is more attractive to the candidate. It just looks better. Although there is no liability for the company to pay the gratuity amount on a monthly basis.

The gratuity calculation is as follows:

The amount of gratuity is paid at the rate of 15 days for every complete year of service and is computed as follows:

(RATE OF BASIC + DA) X 15 X NO. OF YEARS OF SERVICE / 26

Therefore, find out the monthly component and add that to the CTC.

Regards,

AJ

Hi Tushar,

Please be informed that there is no percentage since the amount of gratuity won't be a lot if included in the monthly payment.

Regards,
AJ

Hi, Bhusan is correct. If employers pay the employee Rs. 3.5 L or more, then they should do it, but after Rs. 3.5 lakhs, all amounts should be taxable.

Thanks,
Manoj