This article will help an individual to understand about gratuity rules 2024, and different types of forms of gratuity.
New Gratuity Rules 2025
Did You Know Your Years of Service Can Provide a Strong Financial Cushion?
Gratuity is a financial reward given to employees under the Payment of Gratuity Act, 1972, after completing at least 5 years of continuous service. With the Gratuity Rules 2025, there are some key changes you should be aware of, as they may affect your payout. Planning wisely is essential!
How to Calculate Gratuity
Formula:
Example (for a ₹50,000 salary):
- 5 Years: ₹1,44,230
- 7 Years: ₹2,02,922
- 10 Years: ₹2,88,461
Pro Tip: The longer you work, the higher your payout!
What’s New in 2025?
- Inclusivity: Gig workers and contractual employees could now qualify for gratuity.
- Shortened Service Period: The minimum service requirement may be reduced from 5 to 3 years.
- Higher Tax-Free Limit: The maximum gratuity payout limit could increase from ₹20 lakh.
Why This Matters
- For Employees: Time your career moves wisely to maximize gratuity benefits.
- For Employers: Consider employee retention strategies and plan for the associated costs.
Action Plan
- Know Your Numbers: Use the gratuity formula to understand your potential payout.
- Plan Career Moves: Make sure to stay long enough in your job to reap the benefits.
- Leverage Your Payout: Consider reinvesting your gratuity in long-term savings or retirement funds.
By understanding the Gratuity Rules 2025, you can ensure that your years of service work for you, securing your future financial well-being.
Gratuity can be defined as an amount of money that an employee receives from his employer as per the Payment of Gratuity Act 1972. Gratuity is given by an employer to an employee as a token of thanks for rendering his service to the company. Among the various components that are included in an employee’s gross salary, Gratuity rules are one of them. However, an employee becomes eligible for gratuity payments only after the completion of 5 years within the organization.
Important Gratuity Payment Regulations in 2025
| Key Point | Details |
| Eligibility | An employee must complete at least 5 years of continuous service with the employer to be eligible for gratuity. |
| Calculation Formula | Gratuity is calculated as: (15 days of last drawn salary) × (number of completed years of service). |
| Maximum Limit (Private) | The maximum gratuity amount for private sector employees is capped at ₹10 lakh. |
| Maximum Limit (Government) | For central government employees, the maximum gratuity limit is ₹25 lakh due to recent Dearness Allowance (DA) adjustments. |
| Applicability | The Payment of Gratuity Act applies to establishments with 10 or more employees, including factories, mines, plantations, ports, railways, etc. |
| Seasonal Establishments | For employees in seasonal establishments, gratuity is calculated at 7 days of wages per season. |
| Forfeiture of Gratuity | Gratuity can be forfeited in cases of misconduct or gross negligence by the employee. |
What is the Payment of Gratuity Act, 1972?
The Payment of Gratuity Act, 1972, is an Indian law that mandates employers to provide a one-time gratuity payment to retired employees. This Act applies to various sectors, including railways, ports, oilfields, factories, shops, and mines. Under this law, employees who qualify as “employees” per section 2(e) of the Act are entitled to gratuity benefits as specified in section 4.
The gratuity payment is calculated as 15 days’ wages for every completed year of service, including any service exceeding six months. The primary aim of the Act is to offer financial and social security to employees after retirement, particularly benefiting those who have dedicated many years of service to their employers. This Act ensures that long-serving employees receive a financial cushion upon retirement, promoting their well-being and stability.
According to the Payment of Gratuity Act, of 1972
An employee is entitled to receive 15 days of salary as gratuity in every year of his service. As part of the gratuity for an employee’s every year of service, the organization will have to pay an amount that is equivalent to 15 days of his salary which he has last drawn. Here, salary is the sum of basic wages and dearness allowance. Also, an employee receiving gratuity payments up to Rs. 20 lakhs does not have to pay any tax on the amount received by him as part of the gratuity. Moreover, this law applies to only those organizations which have a minimum of 10 employees.
Gratuity Eligibility in India 2025
To be eligible for gratuity in India in 2025, employees must meet certain criteria. Here are the key instances:
- Completion of Five Years of Service: Employees must have completed five years of continuous service with their employer to qualify for gratuity.
- Retirement: Employees are entitled to receive gratuity upon their retirement from the company.
- Death or Disability: If an employee passes away or suffers a disease or accident that prevents them from working, they or their beneficiaries are eligible for gratuity, regardless of the length of service.
- Superannuation: Employees eligible for superannuation, where their retirement fund grows without tax implications until retirement or withdrawal, are also entitled to receive gratuity.
These criteria ensure that employees who have dedicated significant time and effort to their employers receive financial support upon retirement or in the event of unforeseen circumstances.
Gratuity Rules 2024
The new gratuity payment regulations for 2024 have been finalized by the Ministry of Labour and Employment under the Four Labour Code. The new Occupational law is to be implemented on April 1st, 2021. According to experts, organizations will have to bring about changes in their cost to the company (CTC) as well as allowances after the implementation of the new Occupational law. Organizations will have to pay a minimum of 50% of the salary of the employees as basic pay. In such situations where the basic pay of the employee is below 50%, the employers may need to restructure the employee’s salary structure to abide by the new gratuity rules under the four labour codes. An increase in the basic pay of an employee will automatically lead to a higher gratuity payment to the employee.
In accordance with the new definition, salaries should not include bonuses, pension contributions, contributions to a provident fund, house rent allowances, conveyance allowances, gratuities, or overtime. The new Occupational law is expected to bring about a substantial change in the salary structure, according to many experts. Social security deductions like provident fund deductions will increase, but the take-home pay of employees will decrease.
What are the Taxation Rules for Gratuity in 2025?
When an employee receives gratuity while actively employed, it becomes fully taxable as income according to the provisions outlined in the Income Tax Act of 1961. However, if the gratuity is received due to specific circumstances such as death, retirement, resignation, or other stipulated cases, tax exemption is granted under section 10(10) of the Act.
Under the Income Tax Act, any gratuity received by an employee is regarded as income under the ‘Salaries’ category. Conversely, in the unfortunate event of the employee’s demise, the gratuity amount is directed to their nominee or legal heir, as per the situation. In such cases, the gratuity sum is considered the income of the nominee or legal heir and is categorized under ‘income from other sources’ for taxation purposes.
It’s imperative to note that as per the Payment of Gratuity Act, 1972, every employee is required to designate their nominee/s after completing one year of service. This ensures that in the event of the employee’s death, the gratuity amount is smoothly disbursed to the designated nominee or legal heir as per legal provisions. Thus, the mandatory nomination of a nominee safeguards the smooth transfer of gratuity and ensures adherence to legal requirements.
Gratuity Rules: Types of Gratuity Forms
There are different types of forms for gratuity payment serving different purposes. Some of these forms include:
- Form I: Application for gratuity payment
- Form J: Application for gratuity payment for the nominee
- Form K: Application for gratuity payment for the legal heir
- Form F: Application for making the nomination
- Form G: Application for making the new or fresh nomination
- Form H: Application for modifying the nomination
- Form L: It is issued to the employee by the employer mentioning the date as well as the payment amount
- Form M: It is issued to the employee by the employer mentioning the reason behind the rejection
- Form N: It is an application made by the employee to the labour commission
- Form O: It is issued by the concerned authority for appearing for a case hearing
- Form P: Summons which are issued by the concerned authority to be present for the purpose of case hearing
- Form R: It is issued by the concerned authority giving directives to make the gratuity payment.
Where Should You Invest Your Gratuity Funds?
- Emergency Fund: Ensure you have an adequate emergency fund set aside in a liquid account to cover unexpected expenses and emergencies.
- Debt Repayment: Consider using a portion of your gratuity funds to pay off high-interest debt such as credit card balances or personal loans. This can help reduce financial stress and save on interest payments.
- Retirement Accounts: Maximize contributions to retirement accounts such as a 401(k), Individual Retirement Account (IRA), or Pension Scheme. Investing in retirement accounts can provide tax advantages and help secure your financial future.
- Diversified Investment Portfolio: Consider investing in a diversified portfolio of stocks, bonds, mutual funds, or exchange-traded funds (ETFs) based on your risk tolerance and investment objectives. Diversification helps spread risk and may provide better long-term returns.
- Real Estate: Explore investing in real estate properties or Real Estate Investment Trusts (REITs) if you’re interested in real estate investments and have a long-term investment horizon.
- Education Funds: If you have children or plan to pursue further education, consider investing in education funds such as 529 plans or Education Savings Accounts (ESAs) to save for their educational expenses.
- Healthcare Expenses: Consider investing in Health Savings Accounts (HSAs) or setting aside funds for healthcare expenses, especially if you anticipate high medical costs in the future.
Fixed Deposits can also be considered as an option, but it only provide lower returns compared to other financial options. It is always advisable to ask your financial doubts to an expert. For any queries, Vakilsearch experts would be happy to help.
Key insights on Gratuity Payment Rules Act 1972
The Gratuity Payment Rules Act of 1972 is designed to reward employees with a monetary benefit known as gratuity for their service. Here are the key insights:
- Purpose: The Act aims to provide a financial reward to employees as a token of appreciation for their long-term service.
- Employer Responsibility: It is the employer’s duty to ensure the payment of gratuity to eligible employees.
- Gratuity as Part of CTC: Gratuity is included in the employee’s Cost to Company (CTC) and is considered a component of the overall compensation package.
- Tax Implications: Gratuity payments are subject to income tax, as they are considered part of the employee’s salary.
These rules ensure that employees receive due recognition and financial support for their dedication and service to their employers.
Conclusion
New Gratuity rules for gratuity have been formulated in the recent past. In the year 2024, certain changes have been made in the regulatory framework about the receipt of gratuity. Retirees are therefore requested to go through Government websites to stay updated. For any kind of financial help, feel free to contact the experts at Vakilsearch.
FAQs for Gratuity Rules 2025
Will I Get Gratuity for 4.8 Years?
In some places, gratuity may be payable for employees who have completed a certain period of service, while in others it may not be mandatory. You should check with your employer or consult with a legal professional to understand your entitlements.
When Was Gratuity Limit Increased?
The gratuity limit in India was increased in 2018 through the Payment of Gratuity (Amendment) Act, 2018.
Can Gratuity Be More Than 20 Lakhs?
Yes, gratuity can be more than 20 lakhs in India. While the maximum limit for gratuity is 20 lakhs as per the current rules, an employer can choose to pay a higher amount as gratuity if they wish to do so. However, the excess amount will not be tax-exempt.
