Gratuity comes from the word Gratitude which means an act of gifting someone for his/her services. In the corporate world, Gratuity is a benefit given to the employee after he/she exits the company after serving for a certain period.
There is also a law that governs gratuity which is the Gratuity Act of 1972 which has various clauses and rules for taxation, amount, etc.
In this article, we will discuss how to Calculate Gratuity, Eligibility, taxes on the Gratuity amount, rules, and much more.
But first, let’s find out what is Gratuity.
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What is Gratuity?
Gratuity is a benefit that an employee gets from an employer for the services that he/she has provided to the company over the years.
As per the Gratuity Act, in minimum of 5 years has to be severed to become eligible for gratuity however, despite these rules, gratuity can be received by the employee if the employer wants to pay.
This benefit plan is provided by the employer to the employee at retirement, resignation, layoff, or termination, given that the employee has completed five years of service.
Eligibility Criteria for Gratuity
The following are the eligibility criteria for Gratuity-
- The employee should be eligible for the Superannuation benefits to become eligible for the Gratuity
- Minimum 5 years of continuous service is mandatory for the employee to become eligible for gratuity
- Gratuity is also provided given an employee passes away or suffers disability due to illness or accident
How to Calculate Gratuity?
Gratuity is a benefit that an employee earns apart from his/her salary on special occasions like resigning, retiring, etc. It becomes important for you to calculate the Gratuity so that you can make a plan for spending the gratuity amount.
The gratuity amount depends on the last salary that you are drawing from the company and the no of years you have spent in the organization.
The Formula for Gratuity Calculation
The formula for gratuity calculation is as follows-
(15 * your last drawn salary * tenure of working) / 26
For the employees who are not covered under gratuity this is the formula that is to be used for the calculation of the gratuity-
(15 * Your last drawn salary * the working tenure) / 30
Let’s understand it using an example-
- An employee who is covered under gratuity and who has worked in the company for 22 years is now retiring with the last drawn salary of Rs.1,00,000/- per month. The following will be the calculation of the gratuity
The amount of gratuity= (15*100000*22)/26= Rs.12,29,230/- is payable by the employer to the employee for his/her service.
- An employee who is not covered under gratuity and who has worked in the company for 6 years is now retiring with the last drawn salary of Rs.30,000/- per month. The following will be the calculation of the gratuity
The amount of gratuity= (15*30000*6)/30= Rs.90,000/- is payable by the employer to the employee for his/her service.
- The calculation of Gratuity in case of Death of an Employee is as follows-
|Tenure of service||The amount payable towards gratuity|
|Less than a year||2 * basis salary|
|1 year or more but less than 5 years||6 * basic salary|
|5 years or more but less than 11 years||12 * basic salary|
|11 years or more but less than 20 years||20 * basic salary|
|20 years or more||Half of the basic salary for each completed six-monthly period. However, it is subject to a maximum of 33 times the basic salary.|
Taxation of Gratuity
The taxation on the gratuity amount depends on your employment type, i.e. Government or Private Employment.
For Government employees, the employees are exempted from paying any taxes on the Gratuity. It applies to all government employees whether Center, state, or local authority.
For Private Employees, there is a limit up to which taxation will not be applied and that limit is Rs.20 Lakhs. You can expect the taxes on any of the three amounts that you’ll get-
- Rs 30 lakh
- The actual amount of gratuity received
- The eligible gratuity
You’ll be exempted from tax on any of the three calculated amounts, whichever is the lowest and for the remaining amount, you’ll have to pay the taxes.
The taxation will be as per the Income Tax Slab that you fall on with the maximum tax-exempt gratuity amount you may claim, which cannot go beyond Rs 30 lakh.
Rules of Gratuity
There are some rules which are set up to ensure that the gratuity does not get exploited which benefits both employer and employee. The following are the rules of Gratuity which is important to understand-
Relinquishing of Gratuity
The Gratuity Act of 1972 mentions that the employers have a right to withhold the payment of the gratuity in case the employee has been fired for disorderly conduct given that he/she has completed a minimum of 5 years.
Timeline for Gratuity Payment
There are various stages that the Gratuity payment has to go through for the employee to receive the payment. The Gratuity Act mentions the maximum no of days provided for the processing of the Gratuity disbursal. The maximum number of days for making the disbursal is 30 days.
Every organization has a process to follow details of which are as follows-
- The employee first initiates an application process for the Gratuity to the HR Department
- The HR Department will process the application and start the calculation process of the gratuity
- The employer will then release the gratuity amount within 30 days of the application date
Your Gratuity amount will be released within 30 days of the receipt of the application which you’ll have to submit to the HR Department or directly to the employer.
You should stay as long as the company’s values and goals align with yours however, in the case of gratuity, you’ll have to have five years of continuous service to become eligible for gratuity.
In case of bankruptcy, the employee’s gratuity comes under the primary payment list and you’ll be paid the amount. The Gratuity payments cannot even stopped by the Judiciary as well.
The maximum cap for payment of gratuity amount is Rs.30 Lakhs and employers cannot pay more than Rs.30 lakhs to the employee.
I’m Shiv Kumar, a graduate with a passion for finance, marketing, and technology. My journey into finance started with a desire to understand money management and investing.
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