What is gratuity payment?
- Gratuity can be said to be the financial way of saying “Thank You” to an employee for his services rendered.
- Gratuity payment is a monetary benefit given by employer to his employee for rendering a service of minimum of 5 years or more in his establishment. Gratuity act applies where 10 or more persons are employed or were employed on any day of the preceding 12 months.
- Once Gratuity act applies,it will continue to apply.The employer can’t escape from liability by reducing the number of employees. The provisions of gratuity are governed by Payment of Gratuity Act, 1972.
- Gratuity mainly depends on your last drawn salary and the years of service which are rendered to the Company.
When is an Employee eligible for Gratuity?
Following are the few situation when an employee will be eligible to receive gratuity.
- An employee should be eligible for superannuation
- An employee retires
- An employee resigns after working for 5 years with a single employer
- An employee passes away or suffers disability due to illness or accident.
How is the Gratuity amount calculated?
Formula:
Listed below are the components that go into the calculation of the gratuity amount. The amount is also dependent upon the number of years served in the company and the last drawn salary.
Gratuity = N*B*15/26
N = number of years of service in a company
B = last drawn basic salary plus DA
Calculation:
For example, Ram has worked with a company for 20 years and had Rs.30,000 as his last drawn basic plus DA amount, then,
Gratuity Amount for Ram = 20*30,000*15/26 = Rs.3,46,154
Rounding off:
However, an employer can choose to pay more gratuity to an employee. Also, for the number of months in the last year of employment, anything above 6 months is rounded off to the next number while anything below 6 months in the last year of employment is rounded off to the previous lower number.
Employees not covered under the Act:
Even if the organisation is not part of the Act, they can pay gratuity. However, the calculation of gratuity is based on an individual’s half month’s salary for every year that has been completed. The salary includes commission (sales-based), dearness allowance, and basic salary.
The following formula is considered for the calculation of gratuity amount for employees who are not covered under the Gratuity Act:
Gratuity Amount = (15 * Last drawn salary amount * period of service) / 30
For Example:
For example, if you have at a company for 10 years and 8 months and your salary is Rs.60,000, the calculation of the gratuity amount is done as follows:
Gratuity Amount: (15 * 60,000 * 11) / 30 = Rs.3.30 lakh.
Rounding off:
The period of service of an employee is taken as a whole year for the calculation. In case the number of months worked in the last year is less than 6 months, the previous number of completed years is considered. However, if the number of months completed in the last year of service is more than 6 months, the year is considered to be a full year for the purpose of calculation. Thus, the working tenure has been considered as 11 years. If the service period had been 10 years and 4 months (or anything less than 6 months), the number of years of service would have been considered as 10 years only.
As per the rules recorded on the pensioner’s portal of the government, the amount of gratuity at the time of retirement is calculated as follows:
Gratuity Amount is equal to one-fourth of the last-drawn basic salary of an employee for each completed six-month period. The retirement gratuity amount which is payable is 16 times the basic salary. However, it is subject
What are the taxation provisions relating to Gratuity?
Gratuity is considered as your retirement benefit and is tax exempted subject to certain conditions of Income Tax Act. For the intent of taxation on gratuity, employees are divided into two categories:
- Government Employees &
- Private Sector Employees
Any gratuity amount received by an employee (Govt or Private employee) during his service is taxable. But when gratuity is received by the employee at the time of his retirement, death or superannuation then tax exemption rules for government employees differs from private employees.
In case of Government Employees the entire gratuity amount that he/she receives on retirement or on death is exempted from paying any Income tax.
In case of Private employees, they are divided as:
- Private employees covered under the payment of Gratuity Act of 1972.
- Private employees not covered under the payment of Gratuity Act of 1972.
In case, when private employees covered under the payment of Gratuity Act of 1972, any gratuity received is tax exempted to the extent of least of the following:
Statutory limit of Rs 10 lakh Rs 20 Lakh . (Maximum limit / Govt notified amount)
Last drawn salary * 15/26 * No. of completed years of service.(Refer FAQ 6 )
Actual Gratuity received by you.
If the gratuity exceeds the limit mentioned above, then it becomes taxable.
Example: Let us understand the above tax exemption rule with an example. Mr Krishnan receives Rs 10 Lakh as gratuity benefit from his employer. As per the Gratuity Act calculation, he is eligible to receive, let’s say Rs 6.5 Lakh. The maximum notified limit is Rs 20 Lakh. Out of these, Rs 6.5 Lakh is the least one. So, the tax exemption is limited to the extent of Rs 6.5 Lakh only. Mr Krishnan has to pay income tax on Rs 3.5 Lakh (Actual gratuity received – Tax exempted gratuity amount.)
For private employees not covered under the payment of Gratuity Act of 1972, any gratuity received is tax exempted to the extent least of the following.
Statutory limit of Rs 20 Lakh .
Gratuity = Average salary x ½ x No. of years of service.
Actual gratuity received by you.
(Where the gratuity was received in any one or more earlier previous years also and any exemption was allowed for the same, then the exemption to be allowed during the year gets reduced to the extent of exemption already allowed, the overall limit being Rs. 20 Lakh.)
Whereas, gratuity received by the legal heir (or) nominee is not taxable if the gratuity becomes due/sanctioned after the death of the employee. If the gratuity amount becomes due and paid before the death of the employee, then it is taxable under the head ‘Income from Other Sources.’ The nominee / legal heir has to show it in ITR (Income Tax Returns).
No, individuals are not eligible for gratuity after completing 4.5 years. However, as per a ruling made by the Madras High Court, individuals who have completed 240 days in their fifth year of service are eligible for gratuity.
No. Gratuity is not a part of CTC.
Provident fund is created to take care of old age. Contributions to the PF are made both by the employee and employer. It is compulsory to make PF contributions both by the employer as well as employee of a minimum percentage.
Gratuity is paid in view of long period of service in a organisation. Any person who has served more than 5 years in an organisation is given gratuity calculated as 15 days salary for every completed year of service.
No. Gratuity is not deducted from Salary. It is provided for thanking en employee for his services.
Interest at the rate of 8% per annum be paid by the employer if the payment is made within four weeks, failing with rate of interest would be payable at the rate of 10% per annum.
Yes. Provided the required 5 years of service is competed.
