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Gratuity Eligibility Before and After Completion of 5 Years

An employee is eligible to receive the gratuity benefit for providing continuous service to their company for a minimum of 5 years. However, in certain circumstances, gratuity can be availed even if the employee has served the organisation for less than 5 years.
 

As an employee of an organisation, you get compensated monetarily 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 answer the query of ‘gratuity after how many years’ 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?
 

Under usual circumstances, 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 gratuity minimum period 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?
 

Employees who plan to switch jobs after working in a company for 4 to 4.5 years are often confused if they are eligible for gratuity or not.

As explained above, you cannot receive gratuity benefits from your employer unless you have been employed with them continuously for at least 5 years, except for certain situations.

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

Recent Changes in the Gratuity Act - Gratuity Before 5 Years
 

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.

Moreover, 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.

This change will contribute to increasing 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.

How to Calculate 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

Relevance of Gratuity for 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.

Final Words
 

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.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

What is the gratuity amount on the death of the employee?

The gratuity amount upon the death of an employee is as follows:

Number of Years of Service

Payable Amount

< 1 Year

2* Basic Salary

1 Year to 5 Years

6* Basic Salary

5 Years to 11 Years

12* Basic Salary

11 Years to 20 Years

20* Basic Salary

> 20 Years

Half of the basic salary for each completed 6-month period. Note that it is subject to a maximum of 33 times the basic salary.

Will my employer pay gratuity if they have declared bankruptcy?

Yes, employers cannot refuse to pay gratuity even if they declare bankruptcy.

In how many days will I receive my gratuity amount?

Employers are under a legal mandate to release gratuity within 30 days of your retirement or resignation. They will have to pay you an interest quotient on the due amount for any delays beyond this duration.

Disclaimer

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not guaranteed issuance plans, and they will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions, please read the sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • Tax: *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.