Meaning, Eligibility Criteria, & Calculation Formula

Gratuity is a lump sum amount that employers pay their employees as a sign of gratitude for the services given.  The gratuity guidelines are mandated under the Payment of Gratuity Act of 1972. The act was passed by the Parliament on 21 August 1972 and came into force on 16 September the same year.

All relevant and state government departments, defense, and local governing bodies are included under this act. Private establishments can come under its purview issue to fulfill the conditions.
What is Gratuity?
Gratuity is the amount employees acquire as a part of their gross reimbursement from their business enterprise. It’s regulated under the Payment of Gratuity Act, 1972, and is offered as a token of appreciation for an employee’s services to the agency.
The law applies to employees of factories, mines, oilfields, plantations, ports, railway agencies, stores or other establishments with 10 or more employees. All types of government jobs also are covered under this act. It extends to all states of India besides Jammu and Kashmir.
To be eligible for gratuity, an employee has to have completed at minimum 4 years 8 months of employment in the company. However, this circumstance isn’t relevant in case of employee disability or demise due to a twist of fate or severe contamination.
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Gratuity Eligibility Criteria
Under Section 4 (1) of the Act, you want to meet one of the following standards to assert gratuity out of your organization

You need to leave your job after 5 years of work
You are retiring
In the case of your superannuation,*
In case you go through disability because of contamination or accident
In case the employee passes away**

*Superannuation means the attainment of such age by an employee as is constant in agreement or conditions of service about the age at which the employee shall leave the job.
**If an employee dies, the gratuity is paid to his nominee. In case there is no nominee, the gratuity amount could be paid to the deceased person.
How is Gratuity Calculated?
To calculate gratuity, employers in India use a components-based method, wherein the gratuity payable depends on factors:

The employees’ closing drawn salary amount
Years of service

For calculating gratuity, the Payment of Gratuity Act has divided non-authorities employees into two classes: employees who are protected under the act and people who aren’t.
Gratuity Formulation for Employees Covered Under the Act
The last drawn salary consists of basic pay, dearness allowance, and sales commissions.
Example: Let’s assume the employee’s last drawn salary is ₹ 70,000, and the employee has worked with the agency for 20 years and 8 months. The components to calculate gratuity may be: (15 * 70,000 * 21) / 26
We are considering the tenure of working to be 21 years because employees have already worked for more than 6 months into their 21st year of employment. If the employee had worked for two decades and 5 months, then the most effective two decades might be taken into consideration.
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Gratuity Method for Employees Not Covered Under the Act
The last drawn salary includes basic pay, dearness allowance, and salary commissions.
Example: Let’s anticipate the employee’s last drawn salary is ₹70,000, and the employee has worked with the organization for 20 years and 8 months. The method to calculate gratuity may be: (15 * 70,000 * 20) / 30
How Gratuity will be Calculated in Case of Employee Death
In case of an unlucky event, just like the death of an employee, the gratuity amount is calculated based on the employee’s service tenure. Here, once more, there’s a limit of Rs. 20 lakh. Here are table shows how to calculate gratuity in case of employee death

Service Tenure
Gratuity Amount Payable

Less than a year
2 x basic salary

1 year or more but less than 5 years
6 x basic salary

5 years or more but much less than 11 years
12 x basic salary

11 years or more but less than two decades
20 x basic salary

2 decades or more
half of the basic salary for every 6 months.

 
Tax on Gratuity
The taxation process for gratuity relies upon the employees receiving the gratuity amount. Two standard cases get up for the calculation of tax on gratuity:

Government Employee Receiving Gratuity Amount: In case any employee under the country’s government, important authorities or nearby authority gets a gratuity amount, then the amount is fully exempt from Salary Tax.
Any Other Salaried Individual Receiving Gratuity Amount from an Employer who’s Covered by Payment of Gratuity Act 1972: In case of gratuity received by any employee whose enterprise is covered the given amount is exempt from tax.

15 days’ salary according to the last drawn salary of the individual

Any Other Salaried Individual Receiving Gratuity Amount from an Employer who isn’t always Covered by Payment of Gratuity Act: In such a case the least of the following three amounts is exempt from tax.
Rs.20 lakh
Gratuity truly obtained by the employee
The gratuity amount eligible to be received

Gratuity Rules
The gratuity policies are created under the Payments of Gratuity Act 1972.

Any organization which has 10 or more employees is vulnerable to pay gratuity to its employees. This is applicable even if the number of employees in a business enterprise is going under 10
To be eligible to have gratuity, each employee must have finished at least 5 years of service with the employer.
The calculation of gratuity is covered according to the formulation laid down by the Payments of Gratuity Act, that is – Gratuity = Last drawn salary * (15/26) * Number of years of service.
An employee can ask for gratuity even earlier than retirement, but basics after completing at least 5 years of service with an organization.
In case of the unlucky dying of the employee, the gratuity needs to be paid to his/her nominee and may be exempt from taxation.
If the employee faces disablement because of a coincidence or an ailment, he/she might be entitled to their gratuity.
In case of discontinuation of a job due to misconduct, fraud, theft or attack, the employees cannot ask for gratuity from the company.
Even in the case of financial risk, a business enterprise does not have to disclaim the amount of gratuity.

FAQ’s:- 
1. What is a gratuity?
Gratuity is a reward offered most effectively to long-serving employees in a lump-sum amount.
2. What is the maximum money you can get as gratuity in his work life?
The gratuity amount cannot exceed Rs 20 lakhs. Any money beyond this amount could be treated as ex-gratia.
3. Can a contract employee receive gratuity?
No, simplest, the ones on business enterprise payrolls get this gain.
4. Can gratuity be forfeited by using the company?
Yes, your organization can forfeit your gratuity if you have been terminated because of omission or negligence, causing damages or loss to the employer, which includes the destruction of properties and assets. However, the lapse in gratuity could be the same as the harm or loss induced.