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All you Need to Know About the Gratuity Rule

Personal Finance

You must be wondering about your gratuity entitlement if you are an employee. You may have heard about it but need clarification on what it means or how much you can get as an employee. This article will discuss the gratuity rule and how it applies to you as an employee. Keep reading to gather more knowledge about this. This blog post will teach you useful information about it.

The gratuity law can be claimed by employees who have completed five or more years of service.

The gratuity law can be claimed by employees who have completed five or more years of service. This is usually taken as the end of their employment. With an employer and is paid to them on retirement or exit from the job.

The gratuity amount that an employer pays to an employee after completing five years of service (or more) is called gratuity. It may be taxable in the employee’s hands if it exceeds Rs 50 lakhs per year. Or such other amount prescribed by law as per Section 32(c) of the Income Tax Act of 1961.

The gratuity amount is the last drawn salary multiplied by the years of service completed.

The gratuity amount that an employee receives is not taxable in your hands. And will be transferred to you after deducting an appropriate sum for provident fund contributions.

Employers pay it to employees on retirement or when they leave their jobs.

In the Indian context, gratuity is paid to employees who have completed five or more years of service. It is calculated as the last drawn salary multiplied by the number of years completed. Completed in service, and it is not taxable in the hands of an employee.

The amount may be increased if there are exceptional circumstances, such as death due to accidents or natural causes. Retirement on grounds other than age; resignation with one month’s notice, etc., up to a legal maximum (currently Rs 200000/-)


● The income tax that one can save from this goes up to 20%.

● With recent modifications to Section 10, gratuity is tax-free up to Rs. 20 lakh (10).

● It is a one-time cash payment made to the worker upon retirement.

● It is a tax-free amount paid by the company, not the employee.

● Statutory gratuities are the only payments free from income taxes.

A gratuity is a sum of money given by an employer to a worker in recognition of their efforts, according to the Income Tax Act of 1961, which has exempted them from income tax ever since gratuities are not taxable. The maximum annual gratuity is determined based on the age at which you retire or leave your employer’s employment.

It is calculated as below:

The gratuity is calculated as follows:

● Last drawn salary

● 15/26 of the last drawn salary (for conductors) or 15/30 of the last drawn salary (for non-conductors).

● This can be reduced by up to 50% if there has been a long illness, maternity leave, or other circumstances. If you have worked for more than ten years with the same employer, you are not entitled to any other benefits. Like medical reimbursement, you may get more monetary relief instead of a pension plan, depending on your position within that organization.

● If you have retired from service, your gratuity will depend upon whether you were an employee during all these years, exactly as per the above calculation methodologies.

Last Drawn Salary: 15/30 Number of Completed Years

● Last drawn salary: The average of the last ten months’ salary

● 15/30: The ratio of gratuity to last drawn salary

NWC (number of completed years): The number of years you have worked for the company divided by 16.

The gratuity limit has been raised from Rs 10 lakh to Rs 20 lakh in March 2018.

The gratuity limit was raised from Rs 10 lakh to Rs 20 lakh in March 2018. This is the maximum amount an employee can claim as gratuity, and it’s a fixed amount, not a percentage of their salary.

Gratuity is also a gift or parting payment, but it does not have to be paid in cash. Most companies encourage employees to use their savings or tax-free bonds.

Gratuity rules for 2021

The 2021 gratuity rules went into effect on April 1, 2021. The following changes that are mentioned below were made.

The following items previously considered will be excluded from salary per the new definition under the gratuity rules 2021:

● Bonus, pension, PF contributions, transportation allowance, HRA, overtime, and gratuity.

● Employees’ in-hand pay may be reduced due to these new laws taking effect. The deduction for social security programmes like the Provident Fund (PF) will go up.

● Due to the new law’s restriction, an employee’s allowances cannot exceed 50% of their base pay. Employers must raise employees’ basic salaries by 50%; it will be done to comply with this rule by limiting the allowance to 50% of the total salary. The employer will also pay more in staff gratuities, which are given to employees who have been with the business for more than five years. Employees will receive more benefits than before upon retirement as a result.

Retirees should know their gratuity entitlement under the law.

● The gratuity law applies to all employees, regardless of age or service length.

● Employees who have completed five or more years of service are entitled to a gratuity of one month’s salary for every year worked over five years.

● The gratuity amount is the last drawn salary multiplied by the years completed in service (i.e., $80,000 x 6 = $480,000).


This article has helped you better understand the gratuity rule. Gratuity entitlement is a critical topic in India. And we should all be well informed about it to make informed decisions regarding our future. The gratuity rules 2021bought Some significant changes in the gratuity rules have been explained in this article. For additional reading, you should head to Piramal Finance and increase your financial literacy. Keep reading to enhance your knowledge.