Understanding Gratuity: What Are the Current Wage Limits and Maximum Payouts?

Dear Professionals, Can anyone share what the minimum and maximum wage is to be considered for covering an employee under the Gratuity Act? What is the maximum gratuity to be paid? As per the act, it states that the maximum amount of gratuity payable to an employee shall not exceed 20 months' wages. Has this been amended in the Act, or is it still applicable in all companies?

I read that the maximum gratuity is Rs. 3,00,000/-, but I have a doubt about it. Can I seek your insights or experiences on this matter?

I would like to add something regarding the 10 lakh limit. The Rs. 10 lakh maximum limit for gratuity is only for tax calculation purposes. There is nothing in this section that shall affect the ability of any employee to receive better terms of gratuity under any award, agreement, or contract with the employer.

Regards,
Purushottam Dass Matta

There is no minimum or maximum wage limit for an employee to be eligible for gratuity under the Gratuity Act.

Regards,
B. Saikumar
HR & labor law advisor
Mumbai

Dear Sai Kumar, It was nice meeting you at CireHR. Could you please clarify the maximum gratuity that should be paid to an employee? Is the maximum amount of gratuity not supposed to exceed 20 months' wages? Can I expect a correct answer to the above query?

Thank you.

Gratuity Limit and Calculation

Sub-section (3) of Section (4) stipulates a maximum limit for the gratuity amount to be paid to an eligible employee. Previously, the maximum limit was Rs. 3.5 lakhs. In 2010, this subsection was amended, and the maximum limit has been enhanced to Rs. 10 lakhs. This means if, by applying the gratuity formula, the amount of gratuity payable to an employee works out to Rs. 12 lakhs, the employee will be paid only Rs. 10 lakhs under the Act, not Rs. 12 lakhs.

Gratuity is payable at the rate of 15 days' wages last drawn for each completed year of service under the Act as follows: Wages for this purpose, in plain terms of the definition of wages under Sec. 2(s), can be Basic + DA.

Basic + DA / 26 x 15 x number of years of service.

The Act does not prescribe any formula for the calculation of gratuity based on the number of months. However, the Act allows an organization to frame a gratuity scheme with better terms. You must have your own gratuity scheme with that kind of formula.

Regards,
B. Saikumar
Mumbai

Maybe I am wrong, but there is no such limit for gratuity. Yes, the limit is 10 lakhs, but it's only to calculate income tax. Up to Rs. 10 lakhs is exempted from income tax; after 10 lakhs, it becomes a taxable amount. Please, could other seniors also clarify whether I am mistaken.

Regards,
Manish Bali
Manager, HR, Jindal Group

Understanding the Gratuity Cap Under the Payment of Gratuity Act

Sub-Sec. (3) of Sec. 4 of the Payment of Gratuity Act reads as follows:

"The amount of gratuity payable to an employee shall not exceed ten lakh rupees."

There is not a word more or a word less in the sub-section. Thus, there is nothing in this sub-section to suggest that the ten lakh cap is only for income tax exemption purposes and that gratuity can be paid without any limit. However, an organization may frame its own scheme with better terms wherein there may not be such an upper ceiling but limiting income tax exemption up to ten lakhs only. You are probably referring to such a gratuity scheme.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Gratuity Payment Limits and Policies

The ₹10 lakh limit is applicable as far as income tax law is concerned. A company can pay more depending on its own gratuity policy. I know of a company where gratuity is paid at the rate of 15 days per year for up to 15 years of service, and thereafter at the rate of one month per year. I do not think there is any upper limit.

Have a nice day.

Regards,
S.K. Deshpande
Kandivali East, Mumbai.

A company has the option either to follow the Gratuity Act or frame its own gratuity policy with terms and conditions better than those under the Gratuity Act. If it follows the Gratuity Act, then the gratuity shall be computed according to the formula stipulated in the Act and pay gratuity subject to the maximum of Rs. 10 lakhs stipulated under Sub-Sec. (3) of Sec. 4. Alternatively, it can frame its own policy with a better computation formula with or without the upper limit. The gratuity that is being referred to by you must be one framed by the company and is beyond the Gratuity Act.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Once again, the maximum limit of 10 lakhs is being considered in other insights. There is no maximum limit for IT calculation; whatever amount falls under the gratuity bracket is taxable.