What is gratuity & how it is calculated

Gratuity
Everything about gratuity
                 
                   In this article, we will talk about the very renowned term "Gratuity".  We will cover the topic in detail and study its various aspects.
              Before moving further let's see what is gratuity. In simple words, gratuity can be described as under:-
Gratuity is a lump sum payment paid by the employer to its employees as a token of appreciation for the services rendered by him.    
                Ordinarily, gratuity is paid at the time of retirement but it can be paid at the death of an employee or if he has become incapacitated for further service due to disability or any disease.
                We will cover the following queries regarding Gratuity:-

  1. What is Gratuity?
  2. What is the minimum qualifying service to become eligible for gratuity?
  3. What do you mean by 'emoluments' for the calculation of gratuity?
  4. What is the formula to calculate Gratuity?
  5. What is the maximum amount of gratuity that can be paid to an employee?
  6. What is Residuary Gratuity?
  7. Can recovery be made from Gratuity?
  8. Payment of gratuity on Dismissal or removal for misconduct, insolvency or inefficiency?
  9. Interest on late payment of Gratuity?
  10. Are NPS employees eligible for gratuity?
  11. Nominations for Gratuity.
  12. Is Gratuity taxable?
                let's discuss the above points regarding gratuity one by one:-
What is Gratuity?

        As we discussed earlier gratuity is paid to an employee as a token of regard for his or her services towards the company or organization. It is paid in a lump sum after a certain tenure of service.

What is the Minimum qualifying service to become eligible for gratuity?

           An employee becomes eligible for gratuity if he has completed five years of qualifying service on his retirement from service as per rule 6.16AA(1). 
         Gratuity shall be payable to an employee on the termination of his service after he has rendered continuous service for not less than five years:-
(a) on his superannuation,
(b) on his retirement or resignation,
(c) on his death or disablement due to accident or disease:
Provided that the condition of five completed year of service shall not be necessary where the termination of the employment of any employee is due to death or disablement:
        In the event of an employee in harness, the Gratuity shall be admissible at the following rates:-
Minimum-Qualifying-service-for-gratuity

                    Here two times the emoluments do not mean two month salary. To know about emoluments read the below para.

What do you mean by emoluments for the calculations of gratuity?

                Under Rule 6.16-C of CSR volume II, The term "emoluments‟ when used for this purpose shall mean "pay‟ as defined in rule 2.44 of the Punjab Civil Services Rules, Volume I, Part I including dearness pay, special pay and non-practicing allowance as determined by the orders of the Government issued from time to time, which the employee was receiving immediately before his retirement, or the date in case of his death.
                    Also as per proviso below rule 6.16 AA of CSR vol. II, In case of all kinds of gratuity, dearness allowance admissible on the date of retirement or death shall also be treated as emoluments along with the emoluments defined in that rule

What is the formula to calculate Gratuity?

        As per Rule 6.16A(3), in the case of Government employees retiring on or after the 1st day of January 2006, the amount of gratuity shall be 1/4th of the "emoluments‟ of the employee for each completed six monthly periods of qualifying service subject to 16½ (sixteen and a half) times the "emoluments‟ in the case of Group "A‟, Group "B‟ and Group "C‟ employees and 17½ (seventeen and a half) times the "emoluments‟ in the case of Group "D‟.
        The mathematical formula for the calculation of gratuity is hereunder:-

Formulat-to-calculate-gratuity
Formula to calculate gratuity

What is the maximum amount of gratuity that can be paid to an employee?

        The amount of gratuity payable to an employee shall not exceed 10 Lakh rupees. As per calculation formula elaborated above sometimes the amount of gratuity becomes 15 lakhs or more but the maximum amount that can be paid to an employee is Rs 10 lakh only. Whereas per 7th central pay commission maximum limit of gratuity is rs 20 lakh.

What is Residuary gratuity?

        If an officer who has become eligible for pension or gratuity under the rules
applicable to him, dies after he has retired from service, and the sum actually received by him at the time of death on account of such gratuity or pension together with the gratuity granted under sub-rule (1), and the commuted value of any portion of pension commuted by him are less than the amount equal to twelve times his "emoluments‟ a gratuity equal to the deficiency may be granted to the person or persons specified in sub-rule (2).
[Rule 6.16AA(4)]
        To clear the concept of Residuary gratuity see the practical example described below:-
        Mr. ‘B’ retired on 30-04-1996 after 12 years qualifying service. He was drawing basic pay Rs. 6000/- per month at the time of retirement. He was paid DCRG of Rs. 3600/- and pension of Rs. 1310/- per month. He did not get commuted any portion of his pension and died on 30-06-1996. Work out the amount of Residuary Gratuity payable to his family.
Answer:  Under rule 6.16AA (4) of the Punjab CSR vol. II, Residuary Gratuity of Rs. 33,380/- will be payable to the family of a deceased employee as calculated below (No DA was admissible on 30-04-1996):-
Emoluments equal to 12 months emoluments =  6000x12  = 72,000-00
Less amount of DCRG received by him    = 6000x6    = 36,000-00
Less pension paid for May & June 1996    = 1310x2    =   2,620-00
                    Balance that is Residuary Gratuity= Rs. 33,380-00

Can recovery be made from gratuity?

        Yes, recoveries can be made from the gratuity. Government reserves the full right to effect recoveries from a gratuity sanctioned under the rules, in the circumstances as recoveries can be effected from an ordinary pension under rule 2.2 (b).

Payment of gratuity on Dismissal or removal for misconduct, insolvency or inefficiency?

        No gratuity may be granted under this rule if the officer was dismissed or removed for misconduct, insolvency or inefficiency.

Interest on late payment of Gratuity?

        If the amount of gratuity is not paid to the officer within three months from the date of becoming the same due, interest at the rate applicable to deposits in General Provident Fund, may be allowed to be paid by the competent authority for the period beyond the period of three months to the end of the month preceding the month in which the payment is actually made if such payment was delayed because of administrative lapse or reasons beyond the control of the officer concerned. 
            In all such cases where interest has to be paid, action should be taken to fix responsibility for the delay and disciplinary action should be taken against the officer responsible for it.
           To clear the idea of interest on late payment of gratuity see the example below:-
            A Govt. employee retired on 31-03-2010. The amount of DCRG was paid to him on 16-12-2010. The employee requested for the payment of interest of 8 months and 15 days on account of delay in payment of DCRG. Comments?
Answer: The request of the employee is against the provisions of rule 6.16AA(9) of CSR vol.II vide which interest beyond the period of three months after retirement to the end of the month preceding the month in which payment is actually made means payable.  So the interest of only 5 months is required to be paid in this case.

Can interest will also be given on the late payment of arrears of gratuity?         

             Arrears which may become due as a result of enhancement of the emoluments after retirement or liberalization of the Pension Rules from a date prior to the date of retirement of Government employee, No interest will be given if the amount paid after the number of years.
For example:-
                    Mr. A was retired on 30-04-95 on superannuation pension and DCRG of Rs. 75000/- was paid on 20-05-1998. As a result of the recommendations of the fifth Punjab pay commission, the pensionary benefits enhanced w.e.f 1-1-1996 vide state Govt. Letter dated 16-07-98. In accordance with these instructions, the revised Gratuity admissible to him worked out to Rs. 2,60,000/-. The difference of Rs. 1,85,000/- was paid to him on 25-07-1999 that is after more than one year from the date of the issue of Govt. Instructions. Please examine whether any interest for such inordinate delay will be admissible to the retiree?
Answer: Vide note below 6.16AA(9) of CSR Vol. II no interest is payable on arrears, which may become due as a result of liberalization of Pension rules from a date prior to the date of retirement of a Govt. employee.

Are NPS employees eligible for Gratuity?

        The answer to the question is Yes. NPS employees mean employees not covered under the old pension scheme who joined on or after 01-01-2004 are also eligible for gratuity. To know more about how it is eligible for NPS employee you can read the article Ex-Gretia, Gratuity and Increase in Matching share for NPS employees.

Nominations for gratuity

            An officer shall, at any time after confirmation, make a nomination conferring on one or more persons, the right to receive any gratuity.  A legal heir nominated by the officer will not be entitled to receive any amount of gratuity before his death.

Is Gratuity taxable?

        As per section 10 of the Income Tax act 1961, Gratuity received by government employee is fully exempt from income tax. This means there is no tax payable on the amount of Gratuity. So gratuity is tax-exempt.

        In the end, we hope this article will help you a lot. Kindly post your comments if you like it and to help others share it with maximum people. Also, follow this website for the latest and useful updates. In case of any query or problem, you can ask in the comment box.
You can also read Everything about Pension?Direct Recruitment after 15-01-15

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3 Comments

  1. Can someone make it clear that Gratuity under Rule 6.16 and 6.16AA both are payable being separate gratuities or only paid under one section i.e. 6.16 AA.

    Under Rule 6.16 gratuity is payable for less than 10 years service at the rate of half of emoluments of completed half yearly service.

    and

    under rule 6.16AA the amount is described under as sub rule (4).

    my question is whether two different amounts are payable on retirement ?

    ReplyDelete
  2. No. Only one rule is applicable to an individual employee

    ReplyDelete
  3. Gratuity contractual/outsource employee ko milti hai kya agar service 5 ki ho to

    ReplyDelete
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