Gratuity New rules: When do you become entitled to gratuity, how is it calculated and what is the rule of tax, know every detail.
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, which the company gives to its employees in exchange for their service. Gratuity in India is regulated under the Payment of Gratuity Act, 1972, due to which employees get a lump sum amount after leaving the job or retiring.
When does one become entitled to gratuity?
To get gratuity, it is necessary for an employee to work continuously for at least 5 years in the same company. However, if an employee dies or becomes a victim of any serious physical disability, then this rule does not apply and the benefit of gratuity is available even without completing 5 years.
Who gets its benefit?
This benefit is available to employees who work in factories, mines, plantations, shops or any such institution where at least 10 people are employed. Gratuity is given in situations like retirement, resignation, dismissal 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
Suppose an employee’s last basic salary and dearness allowance was Rs 50,000 and he worked for 10 years.
(50,000 × 15 × 10) / 26 = Rs 2,88,461.54
If the employee comes in the category that is not covered under this Act, then the formula is slightly different:
Gratuity = (Last Drawn Salary × 15 × Number of Years of Service) / 30
30 days are taken into account in this calculation, due to which the amount of gratuity is reduced slightly.
Is there a 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 this Act, then he gets tax exemption on the lowest of the three conditions – (1) gratuity actually 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 fully funded by the company.
- Maternity leave and other paid leaves are also counted in 5 years of service.
- The employee can make a nominee for his gratuity, so that this amount can be given to the family if needed.
- If an employee dies or becomes disabled during 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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