Gratuity Rules: These are the two conditions under which the 5-year rule doesn't apply! But the gratuity calculation formula changes.

People often believe that a minimum of 5 years of service is required to receive gratuity. However, this requirement doesn't apply in certain situations. However, gratuity calculations are different in these situations. Learn more about this here.

Five years of continuous service with a company is required to receive gratuity. But if an employee dies or becomes disabled in an accident before completing five years, what happens to the gratuity? Will they be paid the gratuity amount in this situation? This question is likely on many people's minds. Learn about the government rules on this matter here.

What is gratuity and what does the 5-year rule say?

Gratuity is the amount a company pays its employees in return for long and excellent service. This is a reward that an employee receives upon leaving or retiring from a job. Normally, if you have worked for a company for five consecutive years, you are eligible for gratuity. However, there are certain special conditions under which the five-year rule does not apply. In such cases, your family or you yourself receive the gratuity amount, but the calculation formula changes.

The five-year rule does not apply in these two situations!

According to the Gratuity Act 1972, there are two situations where the five-year rule does not apply:

Upon the death of an employee

If an employee dies while on the job, the five-year period is not waited for. In such cases, the gratuity amount is paid to the employee's nominee or dependents. You can register your nominee's name by filling out Form F at the time of joining the job.

When an Employee Becomes Disabled

If an employee becomes disabled in an accident and is unable to work again, they are entitled to claim gratuity without completing the 5-year period.

Calculation Formula Changes!

When an employee dies or becomes disabled, they receive the gratuity benefit, but the calculation formula changes. The normal calculation formula is: (Last Salary) x (Number of Years Worked at the Company) x (15/26). However, in these special cases, the formula works like this:

• Less than 1 year of service: Double the basic salary is received as gratuity.
• More than 1 year of service, but less than 5 years of service: Six times the basic salary is received.
• More than 5 years of service, but less than 11 years of service: 12 times the basic salary is received.
• More than 11 years but less than 20 years of service: Up to 20 times the basic salary.
• 20 years or more of service: Up to 33 times the basic salary.

Tax Rules on Gratuity

According to the Income Tax Department, gratuity is taxable only if it exceeds a certain limit. The current limit is up to ₹20 lakh, meaning that if the gratuity amount is up to ₹20 lakh, it will not be taxed. However, if the amount exceeds ₹20 lakh, any amount above this limit will be taxed.

FAQs

Q1: What is gratuity?

A1: Gratuity is the amount a company gives its employees as a reward for long and good service. It is given at the time of leaving the job or retirement.

Q2: What is the maximum gratuity limit?

A2: The company can only provide gratuity up to a maximum of ₹20 lakh.

Q3: How to register a nominee's name?

A3: The nominee's name is entered by filling out Form F at the time of joining.

Q4: If death occurs before 5 years, who receives the gratuity?

A4: In such a situation, the gratuity amount is received by the employee's nominee or his or her dependents.

Q5: How is gratuity calculated in case of death?

A5: Depending on the employee's years of service, gratuity can range from 2 to 33 times the basic salary.