Gratuity

Gratuity is a benefit paid under the Payment of Gratuity Act 1972. It is a sum of money paid by an employer to an employee for services rendered in the company. Gratuity is paid only to those who have completed 5 or more years with the company.

Gratuity Eligibility Criteria :

• The employee should be eligible for superannuation.
• On retirement
• When an employee leaves the organization after working for 5 years with a single employer.
• An employee passes away or suffers disability due to illness or accident.

How to calculate Gratuity :

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.

Formula : Gratuity = N*B*15/26
where,
N = Number of Years Serviced in the Organization
B = Basic Salary including DA

How to Calculate Gratuity ?

If you have been at a company for 10 years and 8 months and your salary is Rs.50,000, the calculation of the gratuity amount is done as follows:
Gratuity Amount: (15 * 50,000 * 11) / 30 = Rs.2.75 lakh.
The 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 to a cap of Rs.20 lakh.

Gratuity Calculation in case of the demise of an employee :

Even if the organization is not a part of the act, they can pay gratuity. An individual's half month's salary for every year that has been completed is gratuity.

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:

If you have at a company for 10 years and 8 months and your salary is Rs.50,000, the calculation of the gratuity amount is done as follows:
Gratuity Amount: (15 * 50,000 * 11) / 30 = Rs.2.75 lakh.
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 to a cap of Rs.20 lakh.

Gratuity Calculation in case of demise of an employee :

The maximum gratuity one can claim of in case of demise is Rs 20 Lakh. The following table shows the rates at which the gratuity will be payable in case of death of an employee:

Tenure of service	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 of the basic salary.

All about advancements with regard to gratuity :

For all the private sector employees and central government employees, the ceiling increased from Rs 20 Lakh to Rs 10 Lakh as a tax-free gratuity.

Tax on gratuity :

The tax process for gratuity is based on the employee who is receiving the gratuity amount. It has two scenarios:

If the government employee is receiving a gratuity :

If the employee of central, state, or any local authority gets the gratuity amount, then it is a tax-free gratuity amount of up to Rs 10 lakh. If any other salaried individual is receiving a gratuity amount from an employer who is covered under the Payment of Gratuity Act. In case the employer is covered under the gratuity act, the following amount is exempted from tax.

15 days' salary according to the last drawn salary of the individual Any Other Salaried Individual Receiving Gratuity Amount from an Employer who is not covered by the Payment of Gratuity Act. In such a case the least of the following three amounts is exempt from tax is Rs.20 lakh

Tax Exemptions on Gratuity :

According to Article 10 (10) of the Income Tax Act, any gratuity amount received by government employees, excluding statutory corporations, is fully exempted from tax.

Up to 10 Lakh, gratuity is tax-free.
(*15/26) X Last drawn salary** X completed year of service or part thereof in excess of 6 months. Gratuity amount that is actually received.
* 7 days in case an individual is an employee of a seasonal establishment.
** Salary amounts to the total salary received by an employee including Dearness Allowance and excluding any other benefits like bonus, HRA, commission, and any other such perquisites.

Gratuity Forfeiture :

As per the Payment of Gratuity Act of 1972, an employer has the authority to withhold an employee’s gratuity, even on completion of 5 or more years of service, if the employee has been fired for disorderly behavior, including attempting to physically injure others while on the job.

Timeline for gratuity payment :

There are three steps involved regarding gratuity payment. These include:

• Initiation :
  • An individual or person who is authorized can send an application to an employer regarding the gratuity he or she is owed by a company.
• Acknowledgment and calculation :
  • The organization that owes gratuity computes the amount as soon as the application is received and will also send a notice of the same to the person and the governing authority with the amount stated.
• Disbursal :
  • The employer, having sent the acknowledgment, has a time period of 30 days to pay the gratuity amount to the individual.