1. On leaving the job: One of the occasions when an employee is entitled to claim gratuity is on the termination of his employment. There can be many reasons for this such as retirement/voluntary retirement, resignation, sometimes the employer may terminate the employee (not for some bad conduct of the employee as in this case the employee may lose his chance of claiming gratuity) or sometimes the employee may find some better opportunity so he might opt for a job-switch. 

2. Death or permanent disablement: The other circumstance where an employee can claim gratuity is in case of his/her death or disablement which renders him permanently incapable of working in that company forever. However in such cases, the Income Tax has relaxed the five years criteria, therefore an employee can claim his/her gratuity even if he/she has worked for less than five years. In case of death, the nominees of the employee are given the gratuity. In the case of the nominee is a minor, the amount of gratuity shall be deposited with the controlling authority. Controlling authority deposit/invest the gratuity amount in a financial institution or bank for benefit of minor, as may be prescribed, until such minor attains majority.

Gratuity is not entitled to any exemption from tax. When an employee receives gratuity it would be taxable under the head ‘Income from salary’. And when the employee is entitled to gratuity on account of his death it would be fall in the hands of his/her nominee and would be charged under the head ‘Income from other sources’.   

For the purpose of calculation of exempt gratuity, employees may be divided into 3 categories 

Government employees: They are fully exempt from receipt of gratuity.

Non-government employees covered under the Payment of Gratuity  Act, 1972: Maximum exemption from tax is least of the 3 below:

1.   Actual gratuity received;

2.   Rs 10,00,000;

3.   15 days’ salary for each completed year of service or part thereof

Non-government employees not covered under the Payment of Gratuity Act, 1972: Maximum exemption from tax is least of the 3 below:

1.   Actual gratuity received;

2.   Rs 10,00,000;

3.   Half-month’s average salary for each completed year of service

Five years continuous service: An employee in order to be eligible to claim gratuity, should have worked with a particular employer for at least five years ( as per Section 10(10) of the Income Tax Act). 

Section 2A of the Gratuity Act, states that ‘continuous period’ shall also include the following: 

If in case the employee is not in continuous service of one year, he/she shall be deemed to be in continuous service of one year if- he/she has, in immediately preceding twelve calendar months, worked under the employer for not less than:

· 190 Days (in case of an employee employed in mines below ground)

· 190 Days (in case if employee employed in an establishment which works for less than six days in a week)

· 240 Days ( in any other case)

If in case the employee is not in continuous service of six months, he/she shall be deemed to be in continuous service of six months if- he/she has, immediately preceding six calendar months, worked under the employer for not less than:

· 95 Days (in case of an employee employed in mines below ground)

· 95 Days (in case if employee employed in an establishment which works for less than six days in a week)

· 120 Days ( in any other case)

If an employee of seasonal establishment is not in continuous service of twelve or six months, he/she shall be deemed to be in continuous service of twelve or six months; if he/she actually worked for not less than seventy-five per cent of the number of days on which the establishment was in operation during such period.

By continuous service for the purpose of gratuity, it is meant uninterrupted service which may be interrupted due to accident, sickness, absence for duty without any leave, leave, lay-off, lock-out, strike or cessation of work (due to not any fault of the employee) are considered as continuous service.

Following days shall also be included while calculating the actual days of an employee has worked for:

If an employee has been absent on his duty due to temporary disablement caused by an accident arising out of and in the course of his employment

Maternity leave for female employee, not more than twelve weeks

The employer may even forfeit the gratuity to which an employee may be entitled to if he leaves his job after 5 years if the company suffers any loss on account of the employee's fault or negligence.  

Calculation of gratuity depends upon two variables:

· Salary

· Superannuation

In calculating the gratuity fifteen days salary is given for every completed the year and as the number of working days in a month is considered to be 26 only (excluding the Sundays) therefore the formula for calculating the gratuity would be:

Formula: Last drawn salary x 15/26 x Completed years of Service (including a part of year in excess of six months)

In case of an employee working in a seasonal establishment, he shall be paid gratuity at the rate of 7 days wages for each season

If an worker or employee becomes disabled due to a disease or an accident and as a result is not be able to perform the task which he/she was performing prior to such disability, however, is re-employed on some other task/job on reduced wages, he/she shall be paid gratuity as follows:

For the period preceding the disablement: On the basis of last drawn wages by the employee at the time of disablement.

For the period subsequent to disablement: On the basis of last drawn reduced wages by the employee at the time of termination of employment.

Gratuity offered to an employee is exempted from being attached in case of a decree against the employee as from a Civil or a Criminal Court, as a decretal amount or fine, as the case may be.