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The gratuity is a lump sum payment made by an employee by an employer at the time of retirement, resignation or completion of a specified period of service. Here is everything you need to know:
Gratuity is a legal advantage in India and applies to employees working in establishments with 10 or more employees.
Gratuity is a financial benefit that employers provide employees as a token of praise for their long -term service. Gratuity acts from the payment of the Gratuity Act, 1972 serves as a retirement benefit, which ensures financial security for employees who have dedicated to a company.
What is gratuity?
The gratuity is a lump sum payment made by an employee by an employer at the time of retirement, resignation or completion of a specified period of service. This is a legal advantage in India and applies to employees working in establishments with 10 or more employees. The employer provides gratuity as a goodwill gesture, but it is also a legal obligation under the payment of the Gratuity Act.
When do you become eligible for gratuity?
To qualify for gratuity, an employee must fulfill the following conditions:
1. Minimum service period: Employees have to complete at least five continuous years to be eligible for gratuity with the same employer. However, this rule is waived in case of death or disability.
2. Employment Type: Gratuity applies to employees in factories, mines, gardens, shops and other establishments with 10 or more employees.
3. Resignation, retirement, or ending: Employees receive gratuity in terms of resignation, retirement, termination, or death or disability.
How to calculate gratuity?
The gratuity is calculated based on the last drawn salary and years of service of the employee. The formula is different for employees covered under the Gratuity Act and which are not.
Gratuity Calculation Sources (for employees under the Act)
The standard formula for gratuity is:
Gratuity = (Last drawn salary × 15 × number of years of service) / 26
Example: Suppose an employee has worked for 10 years with a last drawn salary (original + dearness allowance) of Rs 50,000.
(50,000 × 15 × 10) / 26 = Rs. 2,88,461.54
Here, 15 represents 15 days wages for each full year, and 26 is the number of working days in a month.
Not covered under Act for employees
Some organizations that do not fall under the payment of the Gratuity Act, calculate the gratuity differently:
Gratuity = (Last drawn salary × 15 × number of years of service) / 30
This method results in slightly less paid.
Taxation on gratuity
Gratuity depends on the type of taxation employee:
Government Employees: Completely tax-free.
Private sector staff covered under the Act: A discount of 20 lakh rupees in a lifetime.
Private sector staff were not covered under the Act: Tax exemption applies to at least of the following:
1. Real gratuity received
2. 20 lakhs
3. Gratuity is calculated using the formula
Main point to remember
– Gratuity is not deducted from employee’s salary; The employer funds it.
Five years of continuous service rules include maternity leave and other paid leaves.
– Employees can nominate family members for gratuity benefits.
– In the case of death or disability, gratuity is paid to a person enrolled without the need for five years of service.
