Gratuity Eligibility Before and After Completion of 5 Years

As an employee of an organisation, you get compensated for the services you render. An important aspect of your gross salary is gratuity. Gratuity is an acknowledgement of your dedication and services to your company, and it is usually paid upon retirement, with a few exceptions. However, there are specific eligibility requirements you must meet to enjoy this benefit from your employer, the most important one being the ‘gratuity minimum’ period, or the minimum number of years you must be employed with a company to get the gratuity benefit.
 

Let us understand what is the eligibility for gratuity and its importance during income tax* e-filing.

What is Gratuity?
 

Gratuity is a one-time remuneration or monetary benefit paid to you by your employer for your services to the company. The gratuity period in India is 5 years. It means you must be employed with a company continuously for a minimum duration of 5 years to enjoy the benefits of gratuity.

While the contributions to your gratuity account are made every month during your service, you receive their benefit as a lump sum amount upon retirement.

What are Gratuity Eligibility Criteria Before and After Completion of 5 Years?
 

Generally, you become eligible for the gratuity after 5 years of continuous service with an employer. However, under a few circumstances, you can become eligible for the benefit before 5 years too. Let us have a look at the gratuity criteria in detail:
 

• You must be eligible for your company’s superannuation benefit or their pension program
• You must have retired from service.
• The minimum period to receive gratuity is 5 years of continuous service with the employer.
• However, you become eligible for the gratuity benefit if you are diagnosed with a critical illness or suffer disability due to an accident.
• In the event of an employee’s untimely death, their family can claim gratuity before the 5-year period.

What is the Maximum Limit for Gratuity Provision?
 

The gratuity rules and regulations state that the maximum amount you can receive as a gratuity benefit from your employer cannot exceed ₹20 lakhs. You can receive this amount at the time of retirement, upon legal termination from service, or as an accidental/illness/death benefit.

Can I Receive a Gratuity Before 5 Years?
 

A common question for employees who leave an organisation after approximately four or four and a half years is whether they are eligible for gratuity. The Indian government generally requires employees to complete five years of continuous service to qualify for gratuity. However, there are some circumstances where you can get gratuity before five years:
 

• Death of the employee: Gratuity is payable to the nominee or legal heir if the employee passes away, regardless of the length of service.
• Disability: An employee who becomes disabled due to an accident or illness can also claim gratuity before completing five years of service.
   

The employee will usually not be eligible for gratuity if they resign or are terminated before five years of service.

Recent Changes in the Gratuity Act: Gratuity Before 5 Years
 

These are the recent updates to the gratuity rules:

• Gratuity for journalists: According to the recent changes in the Gratuity Act, journalists can avail of the gratuity benefit if they resign after 3 years of continuous service instead of the usual 5-year period.
• Employee base pay: The base pay for an employee should be 50% of an employee's CTC, and the remaining 50% is made up of various employee allowances.
• Increased gratuity limit: As of January 1, 2024, the gratuity cap for central government employees has been raised to Rs 25 lakh from Rs 20 lakh. As a result, the dearness allowance (DA) has been increased by 50%.
• Eligibility criteria: In order to qualify for gratuity payments, employees must complete a minimum of five years of continuous service. It applies to both private and public sector employees.
• Claim process: To initiate a gratuity claim, employees must submit Form I. Employers are responsible for verifying claims and calculating gratuities promptly. Gratuities must be paid within 30 days of becoming due. The amount owed will incur interest if it is not paid in a timely manner.
• Dispute resolution: A Form N can be submitted to the controlling authority if there are disputes about gratuity amounts or eligibility.

The changes can help increase the gratuity incentive that can be availed by employees. The gratuity amount is to be calculated using the basic salary and the alliances for an employee.

What Does 5 Years of Continuous Service Mean?
 

Since continuous service is one of the most essential criteria for a gratuity benefit, it is necessary to understand what it means.

A continuous service of a minimum of 5 years means that you have been employed uninterruptedly with an employer for at least 5 years. If you resigned from the job and rejoined after a period, or if the company terminated you and re-hired you after a duration, it will not be considered as continuous employment even if the total work tenure exceeds 5 years

How to Calculate Gratuity?

Gratuity calculation depends on various factors defined under the Payment of Gratuity Act, 1972, and company policies for non-covered employees.

1. Key Parameters for Gratuity Calculation

a) Last Drawn Salary

• Includes Basic Salary + Dearness Allowance (DA).
• Excludes bonuses, HRA, and other allowances.

b) Years of Continuous Service

• Minimum 5 years with the same employer (except in case of death or disability).
• Any service beyond 6 months is rounded up to the next full year.

c) Type of Employment

• Determines whether the employee is covered under the Gratuity Act.
• For non-covered employees, the employer may apply a different formula based on company policy.

d) Maximum Limit

The tax-free gratuity ceiling is currently ₹20 lakhs.

e) Reason for Separation

• Gratuity is payable on retirement, resignation, termination, death, or disability.
• In case of death or disability, gratuity is payable even if service is less than 5 years.

f) Employer Category

• Government or private sector rules may differ.
• Some government employees have distinct rules under pension schemes.
   

2. Formula for Gratuity

The formula for gratuity calculation is as follows:

Gratuity = N * B * 15/26
 

Here:

N = The number of years for which you have been employed with the company

B = Your last received basic salary + dearness allowance

Note that figure 15 signifies wages for 15 days, and figure 26 accounts for the usual monthly working days, excluding the 4 Sundays.

For example,

Mr. A worked for a company for 20 years, and his basic salary + dearness allowance was ₹50,000 per month. In this case, the gratuity amount he is eligible to receive is:

20 * 50,000 * 15/20 = ₹7,50,000

Tax exemption on gratuity during income tax e-filing
 

During income tax e-filing, you can avail of tax^* benefits on the gratuity amount you receive.
 

• If you are a public sector employee (except statutory corporations), the gratuity amount you receive is entirely ^*tax-free.

   

• For other employees, the least of the following amounts is tax exempted^* for gratuity payments:

   

  - ₹20 lakhs

  - The actual gratuity amount you received.

  - The gratuity amount you are eligible to receive.

What are the tax rules for gratuity?

The Gratuity Act offers the following *tax benefits:
 

• Gratuity tax status: A gratuity is taxable under the 'Salaries' section of the Income Tax Act and is classified as part of your income.
• Updated tax exemption limit: There is an exemption on gratuity up to a maximum of ₹25 lakh. You are not subject to tax on your total gratuities (from all employers) if your total gratuities do not exceed this limit.
• Government employees: Government employees receive gratuities *tax-free, regardless of the amount.
• Private sector employees: The tax* exemption for private sector employees depends on whether they are covered under the Payment of Gratuity Act, 1972.

Conclusion
 

Gratuity is a monetary reward or recognition you receive from your employer for providing service to the company. Under normal circumstances, you must be employed with your company for a minimum of 5 years continuously to enjoy this benefit. However, there can be exceptional cases where employees or their nominees can receive the benefit before the end of the 5-year period, too. Gratuity acts as a token of appreciation for your contributions and helps ensure financial security for you or your family when needed.