Gratuity Confusion: Is 5.7 Years of Service Enough for 5 or 6 Years of Benefits?

Kindly confirm if an employee with 5.7 years of continuous service will be eligible for 5 years of gratuity or 6 years of gratuity.

The service of more than 5 years and six months would render you eligible for six years of gratuity by a combined reading of Sections 4(2) & 2A. As per Section 4(2), gratuity is payable for every completed year of service and for every part in excess of six months. Section 2A defines continuous service of more than 120 days in a period of six months as six months of service under the Act. So, seven months of continuous service will qualify for one additional year of service for the calculation of gratuity, and accordingly, the calculation of gratuity has to be for six years.

Gratuity

Gratuity is a defined benefit plan and an important form of social security employee benefits. It is one of the many retirement benefits offered by the employer to the employee upon leaving their job. Gratuity is a part of the salary that is received by an employee from their employer in gratitude for the services offered by the employee in the company. An employee may leave their job for various reasons such as retirement, voluntary retirement, resignation, or for a better job elsewhere. Every factory or establishment must pay gratuity to its employees if there are more than 10 employees, according to the Payment of Gratuity Act, 1972.

Gratuity is calculated on Basic + DA. It is tax-free up to 10 lakhs.

Eligibility to receive gratuity

An employee will be eligible for receiving gratuity:
- Only if they complete 4 years, 6 months, and 1 day of continuous service with a single employer when resigning from the company.
- When they retire from the company.
- When they die or suffer a disability due to illness or accident.

Note:
6 months + 1 day of a year can be counted as one year.

Examples for consideration of years:
1) 7 years, 6 months, 1 day = 8 years (considered)
2) 7 years, 6 months = 7 years (considered)
3) 7 years, 4 months = 7 years (considered)

Calculation of gratuity

Gratuity = (last payslip's Basic + DA) * (15/26) * (number of years serviced)

Example:
Consider Basic + DA = 6500
Time period = 6 years, 7 months

Calculation:
Gratuity = (Basic + DA) * (15/26) * no. of years serviced
= (6500) * (15/26) * 7
= 26,250

An employee can give a nomination by filling "Form F" at the time of joining the company (during new joinee formalities). An employee can nominate one or more members of their family to receive the gratuity amount in the event of the employee's death.

To claim the amount of gratuity:

- Form I: Application for gratuity. To be submitted by the employee within 30 days of gratuity being payable.
- Form J: Application of gratuity by nominee. To be submitted by the nominee to the employer within 30 days of gratuity being payable.
- Form K: Application of gratuity by legal heir. To be submitted to the employer within a year of gratuity being payable.
- Form L: Notice for payment of gratuity. On verification of claims, the employer issues a notice to the employee/nominee/legal heir about the amount of gratuity payable within 15 days of the receipt of notice. The payment should be made within 30 days of the receipt of application.

Tax Exemption on Gratuity payment to an employee as per Income Tax Act

For government employees, the entire amount of gratuity received on retirement or death is exempted from income tax. In the case of non-government employees, income tax rules on gratuity depend on whether employees are covered under the Payment of Gratuity Act, 1972 or not.

For non-government employees covered under the Gratuity Act, the income tax exemption on gratuity received is the least of the following:
- 15 days' salary based on the salary last drawn for every completed year of service or part thereof in excess of 6 months. Therefore, the amount that shall be exempt from total gratuity paid is calculated as Last drawn salary (Basic + DA) * 15/26 * years of service.
- Maximum amount specified by the government, which is currently Rs. 10 lakhs.
- Actual gratuity received.

For non-government employees not covered under the Payment of Gratuity Act, the income tax exemption on gratuity received is the least of the following:
- Half month's average salary for each completed year of service. While calculating completed years, any fraction of a year shall be ignored.
- Maximum amount specified by the government, which is currently Rs. 10 lakhs.
- Actual gratuity received.

If there is a clause of 120 days consideration for a fraction of a year, then even 5.4 years will also be eligible for 6 years of gratuity, not for 5 years, and 4.4 years will be eligible for 5 years. Please clarify.

Please note that 4 years, 6 months, and 1 day don't make you qualify for gratuity. One has to have a continuous service of a minimum of 4 years and more than 240 days to qualify for gratuity payment.

Suresh

As regards the eligibility of gratuity with 4.4 years or anything up to 4 years and 6 months of service, it does not fulfill the requirement of having 'in excess of six months' of service.

Dear Suresh,

There has been no mention anywhere of the 240-day completion requirement for the Gratuity payment.

In the fifth year of continuous service, a minimum of 240 days should be completed in establishments that operate six days a week.

In the CTC structure of an employee, if the Gratuity amount is mentioned, and if he or she has completed less than 5 years of service in the organization, then he or she is eligible to get the gratuity amount in the Full and Final Settlement.

Just because the Gratuity amount is mentioned in the CTC does not mean you will get gratuity. A minimum term of continuous service has to be rendered for eligibility to receive gratuity.

Expert of the Act is as follows:

4. Payment of Gratuity.- (1) Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years,

(a) on his superannuation, or

(b) on his retirement or resignation,

(c) on his death or disablement due to accident or disease:

Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement:

Provided further that in case of death of the employee, gratuity payable to him shall be paid to his nominee or, if no nomination has been made, to his heirs, and where any such nominees or heirs are minor, the share of such minor shall be deposited with the Controlling Authority who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed, until such minor attains majority.

Explanation.- For the purposes of this section, disablement means such disablement as incapacitates an employee for the work which he was capable of performing before the accident or disease resulting in such disablement.

(2) For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days' wages based on the rate of wages last drawn by the employee concerned:

Provided that in the case of a piece-rated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the termination of his employment, and, for this purpose, the wages paid for any overtime work shall not be taken into account:

Provided further that in the case of an employee who is employed in a seasonal establishment, and who is not so employed throughout the year, the employer shall pay the gratuity at the rate of seven days' wages for each season.

Explanation.- In the case of a monthly rated employee, the fifteen days' wages shall be calculated by dividing the monthly rate of wages last drawn by him by twenty-six and multiplying the quotient by fifteen.

(3) The amount of gratuity payable to an employee shall not exceed ten lakh rupees.

(4) For the purpose of computing the gratuity payable to an employee who is employed, after his disablement, on reduced wages, his wages for the period preceding his disablement shall be taken to be the wages received by him during that period, and his wages for the period subsequent to his disablement shall be taken to be the wages as so reduced.

(5) Nothing in this section shall affect the right of an employee to receive better terms of gratuity under any award or agreement or contract with the employer.

After completion of 5 years of service, additional time more than 6 months is counted as one year, while less than 6 months is ignored for calculating the service period. We are obligated to implement this formula as per the Gratuity Act. Therefore, the 5.7 years should be counted as 6 years, not five years.

After completion of 5 years of service, any additional period of more than 6 months is counted as one year, while any period of less than 6 months is ignored when calculating the total service period. We are required to implement this formula as per the Gratuity Act. Therefore, the 5.7 years should be counted as 6 years, not five years.

In the Gratuity Act, continuous service for 6 months is defined as 120 days of working, including leave, weekly off, paid holiday, and absent without leave. In such a scenario, even after 5.4 years, a staff member is eligible for 6 years of gratuity. Clarity is needed on this matter.

After completion of 5 years of service, in addition to more than 2 months, will I receive my Gratuity in my consolidated salary? My consolidated salary is Rs. 11525/- per month.

Dear Manisha,

You will receive gratuity for 5 years, i.e., Basic+DA x 15/26 x 5 = your gratuity amount. If you have mentioned a consolidated salary of Rs.11,525/-, is there any bifurcation such as Basic, HRA, other allowances, or any other allowance? If yes, you will get gratuity on Basic salary x the above formula. If not, your gratuity will be as follows: 11525 x 15/26 x 5 = 33,245 based on your above statement.

Regards,
Suresh

Hello Sir/Madam,

Greetings. Could someone kindly clarify whether the number of years to be considered for gratuity computation/payable to an employee who has served 6 years, 5 months, and 10 days is 6 years or 7 years?

Thank you.

Dear Abhiprakash,

Even if you work for 6 years and 6 months, you are eligible for gratuity for 6 years only. Anything above 6 months is considered as 1 year.

Regards,
Suresh

Hello,

I have 6.9 years of experience in the same company, but the company has changed its name twice. According to the official records of the company registration, it shows that the company is less than 5 years old. However, I have an offer letter and other documents in the old name of the company. Am I eligible for gratuity? There are two other people like me waiting to receive gratuity for 8 and 9 years of service.

Now, they claim that we are not eligible since their official registration is less than 5 years.