What is it?
Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company. Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job. An employee may leave his job for various reasons, such as - retirement/superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement.
Payment of Gratuity Act, 1972 provides for a scheme for the payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments. The Payment of Gratuity Act is administered by the Central Government in establishments under its control, establishments having branches in more than one State, major ports, mines, oil fields and the railways and by the State governments and Union Territory administrations in all other cases.
The employer may pay the gratuity proceeds from his current revenue. They may set up a gratuity fund as a part of their financial planning. Many insurance companies have designed special schemes which relate to gratuity.
Eligibility
As per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee completes 5 or more years of full time service with the employer(minimum 240 days a year). In other word if an employee at least completed 4 years and 240 days of his employment with the employer then he/she is eligible for the gratuity.
How much your gratuity amount?
The amount you get as gratuity depends on the number of years you have served and the last drawn monthly salary. Roughly, you get half a month’s Basic and DA for every completed year of service. Here’s the formula to calculate gratuity: (Number of years of service) * (Last drawn monthly Basic and DA) *15/26. So, if you have served 30 years and draw monthly Basic and DA of Rs. 20,000 when you leave the job, you get gratuity of Rs. 3,46,154 calculated as (30 * 20,000 *15/26). Your employer can choose to pay you more but the maximum amount of gratuity according to the Act cannot exceed Rs. 10 lakh. Amount paid above this will be in the nature of ex-gratia — something voluntary and not mandated according to law.
If you serve more than six months in the last year of employment, it is considered as a full year of service. For instance, if your tenure is 30 years and 7 months, the years of service for gratuity calculation will be rounded off to 31. But if you serve 30 years and 5 or 6 months, then the number of years of service will be considered as 30. For your convenience I had given a link below to calculate your gratuity.
Waiving the rule
Going by the book, gratuity is payable only if you have been with the employer for five years or more. But this rule is waived if an employee dies or is disabled. In such cases, gratuity is paid to the nominees or to the employee, even if the tenure is less than 5 years.
Even employees not covered under the Payment of Gratuity Act are entitled to gratuity. But in such cases, the formula for gratuity calculation differs. It is computed as the (number of years of service) * (average monthly salary in the last 10 months of employment) * (15/30). This computation makes the gratuity amount lesser than that under the Act. For instance, in the above example, an employee not covered by the Act will be entitled to Rs. 3,00,000 as gratuity, calculated as (30 * 20,000 * 15/30). This is Rs. 46,154 lower than employees covered under the Act are entitled to. Another difference is that only fully completed years of service are considered in the calculations, and partial service in the last year, even if it in excess of six months, is ignored. For instance, service of 30 years and 7 months, will be considered as 30 years and not 31 years.
Another positive is the favourable tax treatment that gratuity receipt enjoys. Tax treatment
If you are a government employee, then the entire amount you get is exempt from tax. If you are not a government employee but are covered under the Act, you get tax deduction for an amount which is the lower of the following:
a) Actual gratuity received
b) 15 days Basic and DA for each completed year of service (according to calculations in the example above)
c) Rs. 10 lakh
Say, in the instance above, your employer paid you gratuity of Rs. 5,00,000, which is more than the Rs. 3,46,154 actually payable under the law. You will enjoy tax deduction on Rs. 3,46,154 and the surplus Rs. 1,53,846 will be subject to tax. Note that the total tax deduction on gratuity amounts received, including those from previous employers in earlier years, cannot exceed Rs. 10 lakh.
Employees not covered under the Payment of Gratuity Act are also entitled to tax deduction on the amount they receive. The deduction rules are similar to those applicable for employees covered by the Act.
Here is the Gratuity Calculator to calculate your gratuity receivable.
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