If you have worked in a company for a long time, then gratuity can be a big benefit for you. This is a kind of financial benefit that the company gives to its employees in return for their service.
In India, gratuity is regulated under the Payment of Gratuity Act, 1972, under which employees get a lump sum amount after leaving the job or retiring.
When does one become entitled to gratuity?
To get gratuity, an employee must work continuously for at least 5 years in the same company. However, if an employee dies or suffers from a serious physical disability, this rule does not apply and gratuity benefits are available even without completing 5 years. Who gets its benefit? This benefit is available to those employees who work in a factory, mine, plantation, shop or any such institution where at least 10 people work.
Gratuity is available in situations like retirement, resignation, dismissal from job or death/disability of the employee. How is gratuity calculated? Gratuity is calculated on the basis of the employee’s last salary and years of work. There are two ways for this – one for those employees who come under the Gratuity Act and the other for those employees who are not covered under this Act.
If the employee comes under this Act, then his gratuity is calculated using this formula:
Gratuity = (Last Drawn Salary × 15 × Number of Years of Service) / 26
(50,000 × 15 × 10) / 26 = Rs 2,88,461.54
If the employee falls in a category not covered under the Act, the formula is different:
Gratuity = (Last Drawn Salary × 15 × Number of Years of Service) / 30
This calculation takes 30 days, which reduces the gratuity amount.
Is there any tax to be paid on gratuity?
- The tax rules on gratuity are different for government and private sector employees.
- If someone is a government employee, he gets the entire gratuity tax free.
- For private sector employees, gratuity up to Rs 20 lakh is tax free under the Gratuity Act.
- If an employee is not covered under the Act, he is eligible for tax exemption on the lowest of three conditions – (1) actual gratuity received, (2) Rs 20 lakh, or (3) gratuity calculated as per the prescribed calculation.
Some important things related to gratuity
- This amount is not deducted from the employee’s salary, but is completely funded by the company.
- Maternity leave and other paid leaves are also counted in 5 years of service.
- An employee can appoint a nominee for his gratuity so that the family can receive the money whenever required.
- If an employee dies or becomes disabled while on the job, gratuity is paid immediately even if he has not completed 5 years.
If you are working in a company for a long time, then gratuity can prove to be a big financial support for you after retirement. Therefore, it is important that you understand its rules properly and take full advantage of it.
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