Gratuity is a financial benefit provided to employees who have worked for a company for a certain period of time, typically 5 years.
However, many employees believe that gratuity can only be received after completing 5 years of continuous service.
This is not always the case. There are situations where employees can receive gratuity even before completing 5 years. Here’s what you need to know:
Gratuity: Key Points
The Gratuity Payment Act, 1972 mandates that employees are entitled to gratuity only after completing 5 years of continuous service.
However, there are some exceptions where employees may qualify for gratuity before completing the full 5 years.
Gratuity Before 5 Years?
An employee can be eligible for gratuity even if they haven’t completed the full 5 years of service, but have worked for 4 years and 240 days.
This is an important provision to note, as it gives employees who are close to completing 5 years a chance to claim gratuity early.
For instance, if an employee joins a company on January 1, 2021, they can be eligible for gratuity even if they resign on August 29, 2025, because their service period will be considered as 5 years due to completing 240 days in the 5th year.
Rules for Gratuity Eligibility
- 240-Day Rule: For most employees, the rule states that if they complete 240 days in the 5th year, their service will be counted as 5 full years, and they will be entitled to gratuity.
- 190-Day Rule: This rule applies to employees working in mines or companies operating less than 6 days a week.
Can the Company Refuse to Pay Gratuity?
There have been varying rulings from different high courts:
Delhi and Madras High Courts: Employees who complete 4 years and 240 days are entitled to gratuity.
Karnataka High Court: This rule applies in cases such as illness, accident, or leave but not for employees resigning voluntarily.
If an employee resigns voluntarily before completing 5 years, they will not be eligible for gratuity.
How is Gratuity Calculated?
The formula to calculate gratuity is:
Gratuity=(15×Last Salary×Service Period26)\text{Gratuity} = \left( \frac{15 \times \text{Last Salary} \times \text{Service Period}}{26} \right)
Example:
If an employee’s last salary is Rs 40,000 and they have worked for 4 years and 300 days (considered as 5 years for gratuity), the gratuity would be:
Gratuity=(15×40,000×526)=Rs1,15,385\text{Gratuity} = \left( \frac{15 \times 40,000 \times 5}{26} \right) = Rs 1,15,385
Is Gratuity Taxable?
According to government rules:
Gratuity up to Rs 20 lakh is tax-free.
Any gratuity amount above Rs 20 lakh will be taxed.
Conclusion
You can be eligible for gratuity even if you haven’t completed 5 full years, provided you meet the 4 years and 240 days criterion.
However, it’s important to note that some companies may refuse to pay gratuity, especially if you resign voluntarily before completing the required service.
If this happens, you can file a complaint with the labor department or take legal action.
Gratuity is calculated based on your last salary and service duration, and it is tax-free up to Rs 20 lakh, making it a valuable financial benefit for employees.
