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Gratuity Policy India

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Gratuity Policy India

Gratuity Policy India

Company Name
Effective Date
Policy Owner
Approved By
Gratuity Trust Name

1. Purpose & Scope

(a)This policy outlines the Organization's obligations and procedures for the payment of gratuity to eligible employees in accordance with the Payment of Gratuity Act, 1972. It applies to all employees who have completed 5 years of continuous service.

(b)The HR department shall be responsible for computing gratuity entitlements, processing claims within 30 days of becoming payable, and maintaining records as required under the Payment of Gratuity Act, 1972.

2. Eligibility & Qualifying Service

(a)An employee becomes eligible for gratuity upon completing 5 years of continuous service with the Organization. In cases of death or disablement, the 5-year service requirement is waived, and gratuity is payable regardless of the length of service.

(b)Continuous service includes periods of authorised leave, lay-off, and suspension not resulting in termination, as well as periods of absence due to temporary disablement caused by an accident arising out of and in the course of employment.

3. Gratuity Computation

(a)Gratuity shall be calculated at the rate of 15 days' wages for every completed year of service, based on the last drawn wages. The maximum gratuity payable shall not exceed the statutory ceiling of Rs. 20,00,000 (Rupees Twenty Lakhs), as per the current amendment to the Act.

(b)Gratuity may be forfeited, wholly or partially, if the employee's service is terminated for any act of wilful omission or negligence causing damage to the Organization's property, or for riotous or disorderly conduct or any act of moral turpitude committed during the course of employment.

4. Nomination & Payment

(a)Every employee shall make a nomination in Form F within 30 days of completing one year of service, designating the person(s) to whom gratuity shall be payable in the event of the employee's death. Nominations may be modified at any time by the employee.

(b)Gratuity shall be paid within 30 days of the date on which it becomes payable. If the Organization fails to pay within this period, simple interest at the rate notified by the Central Government shall be payable from the due date until the date of actual payment.

5. Tax Treatment & Compliance

(a)Gratuity received by government employees is fully exempt from income tax. For non-government employees covered under the Act, gratuity is exempt up to the statutory limit of Rs. 20,00,000 under Section 10(10) of the Income Tax Act, 1961. Any amount exceeding the exemption limit shall be taxable.

(b)The Organization shall maintain all gratuity records, including computation sheets, payment receipts, nomination forms, and trust financial statements, for a minimum of 8 years. This policy shall be reviewed annually to incorporate changes in the statutory ceiling or amendments to the Act.

The guide

Everything you need to know about the gratuity policy India

What Is a Gratuity Policy in India?

A gratuity policy in India explains how the company pays gratuity, a lump-sum reward for long service, under the Payment of Gratuity Act, 1972. Gratuity becomes payable when an employee completes five years of continuous service and leaves through resignation, retirement, death, or disablement. The policy documents eligibility, the calculation formula, payment timelines, and the conditions under which gratuity may be withheld, so employees know exactly what they are entitled to.

Why Companies Need a Gratuity Policy

Gratuity is a statutory obligation, so a clear policy is about compliance as much as clarity. It ensures the company calculates and pays gratuity correctly and within the legal window, avoiding interest penalties and disputes at exit. Documenting the rules also helps HR handle full-and-final settlements smoothly and lets employees understand a benefit that many misunderstand. For finance, a written policy supports accurate provisioning of the gratuity liability each year.

What a Gratuity Policy Should Include

State the governing law and the five-year eligibility rule, including the death and disablement exceptions where the minimum does not apply. Explain the formula: last drawn basic plus dearness allowance multiplied by 15/26 for each completed year of service, and note the statutory tax-exempt ceiling. Cover the nomination process, the payment timeline after exit, and the limited grounds on which gratuity can be forfeited, such as termination for proven misconduct.

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FAQ

Questions about the gratuity policy India

An employee qualifies after completing five years of continuous service with the same employer. The five-year requirement is waived if service ends due to death or disablement, in which case gratuity is paid to the employee or nominee regardless of tenure.

For employees covered by the Act, gratuity equals last drawn basic salary plus dearness allowance, multiplied by 15/26, multiplied by the number of completed years of service. A period beyond six months in the final year is rounded up to a full year.

Gratuity is exempt from tax up to a statutory ceiling, currently 20 lakh rupees for covered employees, with amounts above that being taxable. Government employees typically receive full exemption, so employees should confirm their specific category and limit.

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