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Ten Most Popular FAQs on Gratuity Answered

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Every employee would have heard about gratuity, but not many would know about it fully. Here is an attempt to answer 10 most popular FAQs on gratuity.

1) What is Gratuity?

As the name suggests, gratuity is a reward or gratuity to the employee for his/her services rendered to the organization. It is a fixed retirement benefit given when the employee quits the organization. It is part of the salary offered by the employer.

(Also see: What is Gratuity?)

2) Who is eligible for Gratuity payment?

All employees who leave the organization after completing 5 years of continuous service would be eligible for gratuity from the employer.

3) Can Gratuity be paid before 5 years of service?

There is an exception to the above answer. It can also be paid to the employee before 5 years of service in case of death or disablement. In case of death, the nominee would receive the final amount.

4) Is Gratuity applicable for Contract Employees also?

Yes, the payment is not just for the full time employees. It is also applicable for the part time or contract employees employed by the company. The contractor who has originally hired the employee will be responsible to make the payment.

5) How to calculate Gratuity?

Specific formula has been designed to calculate this. Here is the formula used:

Gratuity Calculation In India = [ (Basic Pay + D.A) x 15 days x No. of years of service ] / 26

(Also  see: Top 10 EPF FAQs)

6) How is it taxed?

For Govt. employees, gratuity amount is totally tax free whereas for non Govt. employees who are covered under the concerned act, it is exempt up to least of the following:

1)      Rs.10,00,000

2)      Actual amount received

3)      Average salary of half month for every completed year of service

7) Is it mandatory for all employees?

Gratuity act 1972 states that all establishments including factories, shop, companies, etc has to compulsorily cover it for their employees if the number of employees in the establishment is 10 or more. Also, it is covered automatically. The employee need not register with anyone for this purpose.

8) What is the maximum amount of Gratuity?

The maximum amount that can be received by any employee is Rs.10 lakh for both Govt. as well as Private sector employees. However, if the employer is willing to pay more, he can do it at his will.

9) What is the duration of receiving gratuity?

After the employee is terminated from his/her position, he/she will become eligible for the payment. The employer has to make sure that payment to the employee is done within 30 days after all formalities have taken place.

10) Can the employer reject gratuity payment under any circumstances?

If an employee has been terminated due to his misconduct during the service to the organization, the employer has every right to reject the payment due to the employee.

  • Kanchan Dutta

    When someone shifts abroad for good, can he apply for EPF withdrawal immediately or there is a waiting time? What are the tax implications? Does he/she get to withdraw all components of EPF like Employer, Employee contribution, pension fund?

    • Av Suresh

      Withdrawal rules are same for all employees. He can apply for EPF components like employee and employer contributions, pension fund immediately whether he is in India or abroad. For taxation of EPF withdrawal, please read: http://www.investmentyogi.com/epf-withdrawal-taxable-for-less-than-5-years-of-continuous-service/

      • Kanchan Dutta

        Thanks a lot Suresh for your reply.

        It means once I receive residence visa of another country, I can apply for “COMPLETE PF” withdrawal immediately? In other words, I can apply the same day I resign and at the start of my notice period?

        Also from the article you referred, it seems that I won’t have to pay any tax as I spent 7 years with the organization.

        I am asking this question because I have a notice period of 2 months. So if I apply on the day of resignation, by the time I leave India I will have the funds available with me.

        • Av Suresh

          You need to wait for at least 2 months after you quit job.

          • Kanchan Dutta

            Even when I have permanent residence visa with me and leaving the country forever? Still I will have to 2 months to apply.

            Thanks again for your response.

          • Av Suresh

            Ya, that’s the general rule with EPF withdrawal. However, you can state the urgency and apply with EPFO.

          • Kanchan Dutta

            Thanks Suresh for your answer. I love the way you make effort to answer our queries.

            I just checked on the website. As per 69(1)(c) Migration from India for permanent settlement abroad or taking employment abroad, settlement can done immediately without waiting period of 2 months.


            I think in the PDF instructions to fill Form-19, the same is mentioned.

            Again thanks for the help.

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