Gratuity is a reward given to you or any employee for loyalty to the Company. The employee has to stay in the Company for 5 years or more, to get gratuity. Any employee, who resigns, is retrenched or retires after 5 or more of continuous service, is eligible for gratuity. According to the Payment of Gratuity Act, 1972, it is compulsory for the employer to pay gratuity and recognize the years of service.
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Payment Of Gratuity Act 1972
- An employee must be employed in a Company to which the gratuity act is applicable.
- He is an employee as defined in Section 2(e):
These are the Companies to which the Payment of Gratuity Act applies:
- Employees who work in mines, oilfields, factories, ports, railways or plantations.
- Every shop or establishment in which there are 10 or more employees, who are employed, or were employed, on any day preceding twelve months as per laws in force in the State.
- Establishments or a class of establishments, in which ten or more employees are employed, or were employed, on any day of the preceding twelve months, as the Central Government may, by notification, specify in this behalf.
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Gratuity can also be paid before 5 years in the following cases:
- If an employee dies.
- If an employee is disabled in an accident or due to a disease.
Gratuity is paid on:
- On retirement of the employee
- On resignation after 5 years or more of service.
- On death or disability in an accident.
If you know the date of superannuation or retirement, then you can make an application 30 days prior to this date. The employer needs to stipulate and mention date of payment, within 15 days of receipt of application. He cannot delay the payment even after 30 days, if there’s a valid reason on your part. If the employer rejects your application, he needs to clearly state why he is doing so.
How is gratuity calculated?
Consider the gratuity calculation:
Formula: Last drawn basic salary * Years of service * 15/26.
Do remember that if you have completed 6 months of service in a particular year, the full year is taken into account for calculation purposes. If it’s less than 6 months, then those months are not considered in the calculation.
Calculate gratuity with an example:
Ravi’s last drawn basic salary is Rs 50,000 a month. He was employed with XYZ Corp for 15 years and 7 months. Let’s calculate his gratuity?
You have to consider 15 years and 7 months as 16 years.
The gratuity is calculated as follows:
= 50000 * 16 * 15/26 = 50000 * 16 * 0.576 = Rs 4,60,800 Lakhs.
Payment of gratuity rules:
Gratuity is payable on:
The exception to the 5 year rule of continuous service:
- Death or permanent disability of employee while in service.
- The employer pays gratuity to the legal heir, irrespective of the number of years of continuous service.
- If the nominee is a minor, the assistant labor commissioner will invest the money in his name in a term deposit with SBI or a Nationalized Bank on the behalf of the minor, till he becomes 18 years.
- No Court can attach gratuity.
- The gratuity is forfeited if you/employee cause a loss to the Company. The employee would lose the gratuity and must be terminated from employment.
Gratuity eligibility in India 2018:
- You are eligible for gratuity after 5 years of continuous service on leaving the job.
- There must not be any break in service.
- In the last year, mere service of 240 days is considered as a year. You get gratuity after 4 years and 240 days.
- If you are working for an organization which has 5 working days, 4 years and 190 days makes you eligible for gratuity.
- Though you have 5 years of continuous service, it does not include leave due to sickness or an accident.
- A strike, layoff or a lockout is not considered as an interruption. A sabbatical or leave without pay is an interruption of service.
- Gratuity is only after an employee leaves his job. (Termination of employment). Termination is retirement, VRS, resignation or a job switch.
- An employer will not give you gratuity beyond the upper limit which currently stands at Rs 20 Lakhs.
- Gratuity given according to a prescribed gratuity formula is tax free. Any amount above this formula is taxed according to taxable income.
Salary: This is basic pay + dearness allowance + commission. Last drawn pay is used for calculation.
Service tenure: More than 6 months service is a year.
Income tax exemption on gratuity:
- Computed Gratuity Amount = Last drawn basic Salary x Tenure of service in years x 15/26.
- Upper limit of Rs 20 Lakhs.
- Actual amount of gratuity.
The least among the following is exempt from income tax.
Calculate income tax exemption on gratuity:
Rajiv’s last drawn salary was Rs 70,000 a month. (Basic Salary + DA). He must get gratuity of Rs 10 Lakhs. Tenure of employment was 15 years and 8 months.
- Gratuity calculated (formula): Rs 6,46,153
- Exemption (Maximum Limit): Rs 20,00,000
- Actual received: Rs 10,00,000.
Lowest of all three is: Rs 6,46,153. Actual gratuity is Rs 10,00,000.
Taxable gratuity = Received gratuity – Exempted gratuity.
As taxable gratuity of Rs 10 Lakhs is less than maximum exemption limit of Rs 20 Lakhs, there is no tax.
How to apply for gratuity?
- If you are eligible for gratuity, send a written application to your employer within 30 days and Form I for the payment of the gratuity.
- If date of superannuation is known, submit the application, 30 days before the date. A nominee must apply for gratuity using Form J within 30 days of being payable.
- A legal heir must apply using Form H within 30 days of being payable.
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