Group Personal Accident

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What are the statutory requirements for Payment of Gratuity?

The sum of money paid to the employee by his/her employer for rendering the services for a long period in the company is known as gratuity.

However, there are certain statutory requirements that one must adhere to while paying gratuity to their employees. These are:

  1. It is paid to employees who have completed at least 5 years in the company.
  2. The maximum amount that can be paid to an employee in the form of gratuity is Rs.10 lakh. Anything that is being paid to the employees above 10 lakh is known as ex-gratia.
  3. The numbers of years are not rounded off to the next number. So, for example, if one has completed 10 years and 10 months in a company, the gratuity would be calculated on 10 years and not on 11 years.
  4. In case of the person being a government employee, he/she will be fully exempt from paying tax on gratuity amount.
  5. In case the person is a non-government employee who is covered under the Payment of Gratuity Act, 1972, then they would be entitled to the exemption limited to the minimum of the amounts mentioned below:
  • 10,00,000
  • 15 days’ salary (7 days for seasonal employees)
  • Actual gratuity received

See: How does Group Insurance Cover Works?

Payment of Gratuity – Statutory Requirements

Following are some of the instances where the employee is eligible for receiving gratuity:

  • When an employee retires
  • When the employee has been providing service for 5 years with the same company/employer
  • When an employee passes away

Calculation of Gratuity:

The main components that are used in order to calculate the amount of gratuity are as follows:

N = number of years of work/service

B = Basic salary that was last drawn (including DA)

15/26 = The number of working days in a month is considered as 26, and so, 15 days’ salary equals to 15/26.

Therefore, the formula for calculating gratuity is:


Additional Read: How Does the Group Gratuity Scheme Benefit Your Institution?

Case Illustration:

Rishi has been working in an IT company for 20 years, and the last salary he drew was INR 30,000 (inclusive of DA).  Therefore, his gratuity amounts to:

= 30000 x 20 x 15/26

= Rs. 346,153.85

Thus, the amount payable to Rishi at the end of 20 years in form of gratuity is Rs. 3,46,153.85.