Question 1

How is gratuity calculated under the Payment of Gratuity Act?

Accepted Answer

Gratuity = last drawn salary × 15/26 × years of service, where salary means basic pay plus dearness allowance. The 15/26 reflects 15 days' wages for each completed year, with a month taken as 26 working days. Any part of a year beyond six months counts as a full year, so 7 years and 7 months is treated as 8 years, while 7 years and 5 months is 7.

Question 2

Who is covered by the Payment of Gratuity Act?

Accepted Answer

Employees of any factory, mine, oilfield, plantation, port, railway company, shop or establishment with 10 or more employees on any day in the preceding 12 months. Once an establishment is covered it stays covered even if headcount later falls below 10. Most private-sector employees in organised employment are covered.

Question 3

What is the minimum service for gratuity?

Accepted Answer

Five years of continuous service with the same employer. The requirement is waived if employment ends because of death or disablement. Courts have treated 4 years and 240 days in the fifth year as satisfying the five-year test in several cases, but this is not uniformly applied; treat 5 completed years as the safe threshold.

Question 4

What is the maximum gratuity payable?

Accepted Answer

₹20,00,000 under Section 4(3) of the Act, in force since 29 March 2018. An employer may choose to pay more under its own policy or a contract, but anything above the statutory formula or the cap is treated differently for tax. The ceiling for Central Government employees was raised to ₹25 lakh from January 2024 under the CCS (Pension) Rules, which is a separate scheme.

Question 5

How is gratuity calculated if my employer is not covered by the Act?

Accepted Answer

Half a month's average salary for each completed year of service: average salary of the last 10 months × 15/30 × completed years. Two differences from the Act formula: a month is 30 days rather than 26, and only fully completed years count, with no rounding up for part years.

Question 6

Is gratuity taxable?

Accepted Answer

Gratuity received by government employees is fully exempt under Section 10(10)(i). For employees covered by the Act, the exemption is the least of the actual gratuity received, ₹20 lakh, and the amount computed by the 15/26 formula. For employees not covered, it is the least of the actual amount, ₹20 lakh, and the half-month formula. Any excess is taxed as salary in the year of receipt. The ₹20 lakh exemption limit is a lifetime limit across all employers.

Question 7

Is gratuity paid on resignation, or only on retirement?

Accepted Answer

On any termination of employment after five years of continuous service: resignation, retirement, superannuation, or termination by the employer. It is also payable on death or disablement without the five-year condition, to the nominee or legal heir.

Question 8

Does the new tax regime affect gratuity exemption?

Accepted Answer

No. The Section 10(10) exemption is available under both the old and new regimes. It is not one of the deductions withdrawn by Section 115BAC.

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