You are currently viewing A Guide for Investment of Gratuity Funds

A Guide for Investment of Gratuity Funds


Last Updated on October 13, 2022 by Kanakkupillai

A Guide for Investment of Gratuity Funds

According to the Gratuity Act of 1972, gratuities must be given to employees as a requirement. In the event that an employee leaves the company, a lump sum payment is made to them. Only if an employee satisfies the requirements outlined in the Gratuity Act will they be eligible for gratuity payment.

Another definition states that a gratuity is a one-time payment made by an employer to one of its employees in the event of the latter’s death, retirement, or superannuation. It is a way for an employer to reward their staff for continuing to work for the company.

To be exact, businesses are required by law to give employees who have worked for them for at least five years a lump sum payment known as a gratuity.

According to its etymology, gratuity—a term derived from thanks—means a reward offered voluntarily. However, in India it is now a legal requirement to be paid by all organizations covered by the Gratuity Act as a result of the implementation of the Payment of Gratuity Act, 1972 (the Gratuity Act).

Deposit of Gratuity Fund

All funds received or accruing to the fund after the [31st day of October, 1974] may be deposited in an Indian post office savings bank account, a current account [or in a savings account] with any scheduled bank, or used to make contributions under the Group Gratuity Scheme entered into with the Life Insurance Corporation (LIC) of India established under the Life Insurance Corporation of India Act.

What are the Investment Options for Group Gratuity Trusts?

  • Self-management under PMS—as per the Prescribed Investment Guidelines for Group Gratuity Funds.
  • Investment in Traditional Funds of Insurance Companies (e.g., LIC)
  • Investment Unit Linked Insurance Plans (ULIPs) of Insurance Companies via an Advisory

Where should I Invest my Gratuity?

If you won’t need your gratuity money for the next 15 years, consider investing in one or two multicap funds. Don’t invest the entire sum at once. Over the following three years, transfer all of the funds from the fixed-income fund to the equity fund.

A contribution of 8.33% for each year of prior service by an employee can be made to the gratuity fund as a tax-deductible expense if the gratuity liabilities are being covered for the first time. Earnings from investments made with the gratuity fund are tax-free as well.

Gratuity Calculator

The formula for calculating gratuities is gratuity = (15 ´ working tenure ´ last drew salary)/30. For instance, even if you’ve been employed by a corporation for seven years, it is not subject to the Gratuity Act. Additionally, your base pay was Rs. 35,000. Consequently, the gratuity amount is (1,22,500) = (15,35,007 * 7).

A gratuity calculator is a tool used to calculate how much gratuity an employee will receive after working for a company for at least five years. A person can estimate how much gratuity they will receive using one of the various Internet calculators that are available. The gratuity calculators use a formula to determine the amount of gratuity based on inputs such the latest drawn monthly income, years (including months) of employment, dearness allowance, etc.

Eligibility Criteria for an Individual to Receive Gratuity

If a person satisfies the requirements listed below, they are eligible to earn the gratuity:

  • person must meet the requirements for superannuation
  • The person had to have left their position after five years of continuous work with the same company.
  • The person must be retired from their position.
  • If that person passes away or becomes incapacitated as a result of an illness or accident.

How to Calculate Gratuity?

One must use the gratuity formula to calculate tips online. However, a worker must fall into one of the following groups in order to use this formula:

  • People who fall under the 1972 Payment of Gratuity Act’s protection
  • People who are not protected by the 1972 Payment of Gratuity Act

For Workers Protected by the Payment of Gratuity Act of 1972

The gratuity formula in this case is as follows:

Gratuity Amount = (15* Salary Last Drawn * Employment Period)/26

where, the last-drawn paycheck consists of the base pay, sales commissions, and dearness allowance. To further grasp this, let’s look at an example:

For instance, Mr. X’s most recent basic pay was Rs. 40,000 per month, and he worked for ABC Company for 25 years, 10 months. The gratuity in this instance will be:

Gratuity Amount = (15 * Salary Last Drawn * Employment Period)/26

Gratuity Amount of Mr. X= (15*40000*26)/26 = Rs.6,00,000

Given that the overall length of service in this situation is 25 years and 10 months, 26 years is the rounding factor.

For Employees Not Covered by the Act of 1972 on the Payment of Gratuities

The following is the gratuity calculation for people not covered by the Payment of Gratuity Act:

Gratuity Amount = (15 * Salary Last Drawn * Employment Period)/30

Here, the amount of gratuity received is based on the wage for one-half of a month for each year of service that has been completed. The basic wage, sales commission, and dearness allowance are all included in the final salary drawn.

The 15/30 computation denotes 15 days out of a month’s 30 working days. To the nearest full year, the total number of service years is rounded down. Let’s look at an example to better grasp this:

For instance, Mr. X works for a company that is exempt from the Payment of Gratuity, 1972, Act. However, he has worked for that firm for 24 years and 5 months, and his most recent basic wage was Rs. 30,000. According to the example’s gratuity formula:

Gratuity Amount = (15 * 30000 *25)/30 = Rs. 3,75,000

To the nearest year, which in this case is 25, the service period is rounded off.

In this manner, the gratuity calculator will compute the tip using any of the aforementioned formulas (depending on the employee).

Therefore, the following two factors affect the gratuity payment:

  • The last drawn salary
  • Total number of service years

The exact gratuity amount that an employee is required to receive at retirement or while leaving the company is not specified by law with a specific percentage. The employer may choose to pay more than that or use the formula-regulated technique to determine the outcome.

Gratuity Rules

The Payment of Gratuity Act of 1972 gives employers the option of giving up their gratuity payments. The person has completed at least five years of employment with the organization. There are several gratuity regulations. Let’s examine each of the gratuity regulations individually.

  • The threshold for the amount of gratuity ceiling has been raised from the previous limit of Rs. 10 Lakhs to Rs. 20 Lakhs in the announcement of the Government of India’s interim budget for the year 2019. The PSU employees and those who are not protected by the Payment of Gratuity Act will benefit from this rule, which will take effect on March 29, 2018.
  • Only for government employees, the top limit for gratuity payments has been raised; for nongovernment employees, the norm remains the same, i.e., gratuity payments are never allowed to exceed Rs. 10 lakhs. Ex-gratia is the term for any gratuity overage.
  • There are more than six months in the final month of a person’s employment year, the number is rounded up to the next number. A person would receive the gratuity of 16 years, for instance, if their service period was 15 years and 7 months. However, if it ends up being 15 years and 4 months, the employee will receive a 15-year gratuity.

Taxation Rules for Gratuity Calculation

After calculating the gratuity, it is time to comprehend the gratuity taxation regulations. The type of employment directly affects how gratuities are taxed. Three broad categories can be briefly used to group the workers:

1. Employees who are in Government Service

Any government worker is qualified to receive a gratuity that is tax-free. Regardless of whether they work for the federal government, a state government, or a local authority, all gratuities received by government employees are exempt from income tax.

2. Employees Covered in Payment of Gratuity Act

The last 15 days of income received by employees whose employers are covered under the Payment of Gratuity Act are exempt from income tax.

3. Employees not Covered by the 1972 Gratuity Payment Act

Employees will receive income tax exemptions from the least of any of the following sums if their employers are not covered by the Payment of Gratuity Act, 1972:

  • 10 Lakhs
  • The actual gratuity amount received
  • Salary of half a month for each year of employment that has been completed by the employee with the employer.

Gratuity Rules in India

The Gratuity Act was created to give employees a financial incentive in the form of a gratuity in exchange for their services.

The payment of gratuities is the employer’s responsibility.

Employers are required to provide employees a gratuity.

The cost of an employee to the employer includes gratuities.

Due to the fact that gratuities are considered to be part of salaries, income tax is due when they are paid.

What are Gratuity Rules in India?

The Payment of Gratitude Act, passed in 1972, established the gratuity regulations. This law was approved by the Parliament on August 21 and went into effect on September 16 of the same year.

Gratuity rules in India are mentioned below:

Gratuity is payable if a company has 10 or more employees:

Companies are required to pay gratuity if they had 10 or more employees working for them on any given day throughout the previous 12 months. According to the Gratuity Act, the corporation will still be required to pay the gratuity even if the number of employees is down to less than 10.

For gratuities, employees must have at least five years of service: 

Those who have worked for the company for five years are entitled for gratuities. The requirement does not, however, apply when an employee passes away or becomes disabled.

As far as we are aware, this statute covers businesses with 10 employees or more per day for the previous 12 months.

Gratuity = (15× last drawn salary × number of completed years of service)/26

No additional portion of the last drawn salary will be included; it only consists of the basic wage and the dearness allowance.

Any year in which an employee worked for more than six months is considered to be a completed year of service.

Gratuity can be paid before retirement:

However, there are other circumstances in which one may be eligible for gratuity, such as:

Once a person has worked for a company for five years, they are eligible to request a gratuity upon changing positions. Even if an employee’s employment is terminated, they are still entitled to a gratuity, but they cannot make a claim if the reason for the termination was due to fraud, theft, assault, rape, or molestation.

The nominee or legal heir will receive the gratuity payment if an employee passes away while still on the job.

When an employee becomes disabled due to an illness or accident, they are entitled to gratuity.

If an employee chooses a voluntary retirement plan(VRS), he is entitled to a gratuity.

Tax-free gratuities are given to an employee’s widow or legal heirs as follows:

The gratuity provided to a deceased employee’s widow or other legal heir is not subject to taxation.

Gratuities up to Rs. 20 lakh are tax-free: 

According to the Gratuity Rules 2021, gratuities paid by organizations covered by the Payment of Gratuity Act, 1972, up to a total of Rs. 20 lakh, are exempt from taxation. Additionally, gratuities made by federal, state, and local governments are also exempt from taxation.

Employers are obligated to show gratitude to their staff even when they are bankrupt:

Even when an organization declares bankruptcy, the employees must still get gratuities, and no court ruling can prevent an employee from receiving gratuities.

Gratuity Eligibility in India

The situations in which employees are entitled to gratuities in India are listed below:

When the employee has served continuously for five years in the relevant organization.

At the moment of retirement, an employee is qualified to receive appreciation.

An employee dies, contracts an illness, has an accident, etc.

An employee should be eligible for superannuation(under this program employee’s fund deposited grows without any tax implications, until retirement or withdrawal).

What is the Payment of Gratuity Act, 1972?

According to the Indian Gratuity Act, 1972, corporations are required to give retired workers a one-time gratuity. This regulation covers all industries, including mines, railways, ports, factories, and oil and gas fields. Employees who fall under the definition of “employee” as stated in Section 2(e) of the act are eligible to receive a gratuity, according to Section 4 of the Payment of Gratuity Act, 1972. 

The service rendered by the employee must have lasted more than six months or a portion of a year, and the gratuity comprises 15 days’ earnings for each year. The primary goal of this act’s enforcement is to give workers financial and social security after they retire. It is a security measure designed for workers who supply services for an extended period of time.

Gratuity New Rules 2022

On July 1, 2022, the new labor law went into effect for all businesses and organizations. The working hours, provident fund, and in-hand salary were decreased in accordance with the new labor law. This law will have the most effect on take-home pay.

According to the gratuity rules 2022, employers must make sure that basic pay makes up 50% of an employee’s cost to the company and that employee allowances, house rent, and overtime make up the remaining 50%. Additionally, any additional allowances or exemptions that the corporation grants that go beyond 50% of the CTC will be regarded as compensation.

According to the 2022 gratuity new guidelines, the maximum basic pay is limited by law to 50% of cost to company, increasing the gratuity bonus that must be provided to employees. The gratuity amount will also be determined on a sizable salary base that includes basic pay and allowances.

When an employee works overtime, which is defined as working for 15 minutes or more, they are paid.

The work capacity is capped at 48 hours, according to the government.

For workers, gratuities are essential since they serve as post-retirement plans. To ensure that they can profit the most from gratuities, employees in both the public and commercial sectors should be aware of these rules. It is a monetary reward given to an employee in exchange for his or her service and loyalty to the company. Given the foregoing, we trust that our blog has provided the interested readers with a fundamental grasp in this area.


Kanakkupillai is your reliable partner for every step of your business journey in India. We offer reasonable and expert assistance to ensure legal compliance, covering business registration, tax compliance, accounting and bookkeeping, and intellectual property protection. Let us help you navigate the complex legal and regulatory requirements so you can focus on growing your business. Contact us today to learn more.