Understanding your salary may appear to be simpler, but it is not. It includes many variables such as house rent allowance, conveyance allowance, contribution to employee provident fund, and so on. The most important of these is gratuity. It is a lump sum payment that can be extremely beneficial, particularly during retirement. Let us understand gratuity and its various aspects in depth.
What is Gratuity?
Gratuity refers to an employment benefit you receive from your employer in exchange for your services for a specific period. Gratuity benefits are available after five years of continuous service with the concerned organisation. The terms and conditions of the gratuity are as per the Payment of Gratuity Act, 1972.
Primarily, the gratuity amount depends upon the service tenure and the last drawn salary. The last drawn salary means basic salary, dearness allowance (DA), and any commission you receive on meeting sales targets.
Key Highlights from the Payment of Gratuity Act, 1972
The provisions of this act apply to employees of ports, mines, plantations, and any other organisation with more than ten employees.
| Applicability | Government and private employees |
|---|
| Minimum service | Five years |
| Minimum employees | Ten |
| Tax exemption | Up to Rs 20,00,000 |
| Gratuity payable | After resignation/ retirement/ death |
How is Gratuity taxed?
Gratuity taxation depends on your employment type. You do not have to pay taxes if you work for the government, whether it is the state, the central, or a local government.
For non-government employees, the tax-exempt amount will be the least of the following.
- Rs 20,00,000
- The actual gratuity you received
- The eligible gratuity
Gratuity taxation example–
Suppose you receive a gratuity of Rs 14,00,000. However, based on past calculations, the gratuity you were earlier eligible for was Rs 4,00,000.
Since the upper exempt limit is Rs 20,00,000, the tax-exempt amount, in this case, will be Rs 4,00,000, the lowest figure of all.
The taxable gratuity here will be Rs 10,00,000. (Rs 14,00,000 – Rs 4,00,000). The tax rate would be as per your income tax bracket.
How is Gratuity computed?
The gratuity computation method is different for various situations. The straightforward formula is detailed below.
Gratuity = [(N × B) × 15/26]
Where
"N" means the number of days you worked with any specific organisation
"B" means the last drawn salary
Now, let's pick each situation one by one.
-
Employees not covered under the Payment of Gratuity Act, 1972
The gratuity computation is based on the half-month salary, which is 15 days.
Gratuity = (15 × L × P) ÷ 30
Where
"L" means the last basic salary
'P' means the period of service
Suppose the period of your job is 11 years and 8 months. Your last basic salary is Rs 45,000. The gratuity will be–
= (15 × 45,000 × 12) ÷ 30
= (81,00,000 ÷ 30)
= Rs 2,70,000
Note: If the final service period exceeds six months of the last year, it will be rounded up to the following year. If it is less than six months, the lower year will be considered.
-
Gratuity in case of death
The gratuity will be computed based on the number of years the deceased worked for the organisation.
| Service Tenure | Gratuity in Salary |
|---|
| Less than a year | 2 × Basic salary |
| Between 1-5 years | 6 × Basic salary |
| Between 5-11 years | 12 × Basic salary |
| Between 11-20 years | 20 × Basic salary |
| Above 20 years | Half of the basic salary is computed considering every six months. The maximum limit here is 33 times. |
What are some crucial Gratuity rules?
-
Gratuity forfeiture:
Gratuity may be forfeited if the employee was terminated for misconduct or fraudulent behaviour. -
Payment timelines for Gratuity
The gratuity payment timelines depend upon the following factors.
-
Payment initiation
As an employee, you must send a request letter to your employer to initiate the gratuity payment.
-
Acknowledgement
After receiving your application, the appropriate person in your organisation will calculate the gratuity and notify you in writing.
-
Disbursement
Payment must be processed within 30 days of the company sending the acknowledgement.
Also Read: EPF Advance vs. Personal Loan: Which is Better? Final Words
Gratuity is an additional monetary benefit you receive for providing services for a set period. It is completely tax-exempt in the hands of government employees, but the exemption limit for private company employees is Rs 20,00,000.
