Calculation and Payment Under explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Gratuity is a statutory retirement benefit under the Payment of Gratuity Act 1972 (being subsumed into the Social Security Code 2020). It is a lump sum payment by an employer to an employee as a token of appreciation for services rendered. Understanding eligibility, the calculation formula, and tax treatment is essential for both employers and employees.
Eligibility Conditions
- Employee must have completed at least 5 years of continuous service
- Gratuity is payable on: retirement, superannuation, resignation, death, or disablement
- For death/disablement: 5-year condition is waived
- "Continuous service" includes periods of illness, maternity leave, lay-off, and authorised absence
Gratuity Calculation Formula
Where: Last drawn salary = Basic Salary + Dearness Allowance; 15 days = 15/26 of monthly salary (month = 26 working days)
Example
Mr. Singh retires after 25 years with last drawn basic + DA = Rs. 60,000/month.
- Gratuity = Rs. 60,000 × 15/26 × 25 = Rs. 60,000 × 0.5769 × 25 = Rs. 8,65,385
Maximum Gratuity Limit
The maximum gratuity payable under the Act is Rs. 20 lakh (increased from Rs. 10 lakh). This limit applies per employee per employer. If the calculated amount exceeds Rs. 20 lakh, only Rs. 20 lakh is paid.
For Non-Covered Employees (Ex Gratia)
Employees not covered under the Gratuity Act (e.g., in establishments with less than 10 employees) may receive ex gratia gratuity. The Gratuity Act itself only covers establishments with 10+ employees.
Social Security Code 2020 Changes
- Gratuity payable to fixed-term employees proportionately (without the 5-year condition) — a significant change
- Working journalists: eligible after 3 years of service
Tax Exemption on Gratuity
| Category | Exemption |
|---|---|
| Government employees | Fully exempt |
| Non-government (Gratuity Act covered) | Least of: actual gratuity, 15 days × completed years, Rs. 20 lakh |
| Non-government (not Act covered) | Least of: actual gratuity, ½ month salary × years, Rs. 20 lakh |
Forfeiture of Gratuity
Gratuity can be forfeited (wholly or partially) if the employee is dismissed for: (a) moral turpitude, or (b) causing willful damage/loss to the employer's property. No forfeiture for ordinary misconduct leading to termination.
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Key Facts About Calculation and Payment Under
- Applies in: All states across India, under the relevant central law.
- Mode: Mostly online via the official government portal.
- Typical timeline: Ranges from a few days to a few weeks depending on the case.
- Non-compliance: May attract penalties, interest or late fees.
- Expert help: TaxClue completes the entire process end to end for you.
What is the minimum service required for gratuity?
5 years of continuous service. However, for death or total disablement, gratuity is payable regardless of service length.
What is the gratuity formula?
(Last drawn basic + DA) × 15/26 × completed years of service. Maximum Rs. 20 lakh.
Over 90% of compliance penalties in India arise from missed due dates — timely handling can save businesses thousands of rupees each year.
Calculation and Payment Under: a key compliance topic in Indian tax and corporate law that businesses and individuals must understand to remain compliant.
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Why This Matters
Staying compliant with Indian regulations protects your business from penalties, interest and unnecessary legal trouble. It is always wise to maintain proper records and documentation so that any future scrutiny can be handled smoothly. Rules and thresholds in labour laws are revised periodically, so it helps to review your obligations at the start of each financial year. Professional guidance from a qualified CA, CS or advocate ensures that filings are accurate and submitted well before the due date.
Small businesses and startups especially benefit from setting up a simple compliance calendar to track recurring deadlines. Government portals now allow most applications and filings to be completed online, reducing paperwork and turnaround time. Keeping your PAN, registration certificates and board resolutions organised makes every subsequent filing faster. When in doubt, it is better to seek clarification early rather than risk a notice or a late-filing penalty later.
A clear understanding of the applicable law helps you make confident, well-informed business decisions. TaxClue's experts regularly assist businesses across India with end-to-end labour laws support at transparent, affordable pricing. Timely compliance also improves your credibility with banks, investors and government authorities.
Getting Calculation and Payment Under right the first time saves both time and money. Many businesses seek expert help for Calculation and Payment Under to stay fully compliant.