Hello and Welcome. In this post, we will discuss all about Gratuity in India. We will cover the following topics:
- What is gratuity?
- Gratuity Applicability
- Employees who are eligible for gratuity
- Gratuity formula
- Is gratuity taxable?
What is gratuity?
Gratuity is a monetary / loyalty benefit given by an organization to its employees at the time of leaving the organization. As per the gratuity law, it is applicable for people who have worked in the same organization for 5 or more years. While it is usually paid at the time of retirement, it can also be paid before if certain conditions are met. This benefit is made mandatory by Payment of Gratuity Act, 1972 in recognition of employee’s years of service in the organization.
Gratuity applicability for organizations:
As per Payment of Gratuity Act, the scheme for the payment of gratuity is applicable for:
- railway companies,
- shops or other establishments.
In general, Gratuity is applicable to any organization which employs ten or more people or has employed (10 or more people) at any given time in the preceding twelve months.
Gratuity eligibility in India
An employee is eligible to get gratuity under the following circumstances:
- An employee retires after completing 5 years of continuous service with the same organization.
- If an employee resigns after 5 years of working with the same organization.
- Temporary staffs, contract workers are also eligible for gratuity as long as they are considered as employees in the company
- If an employee is being transferred overseas on an assignment, then he / she is eligible for gratuity.
- An employee who passes away or suffers disability due to illness or an accident.
In India, Gratuity calculation of gratuity is on the following formula: Gratuity = Last Drawn Salary × 15/26 × No. of Years of Service
Example: Imagine that you worked with ABC company for a period of 15 years. Your last drawn basic salary along with dearness allowance was Rs 30000. Hence, The amount of gratuity = 15*30000*15 / 26 = Rs 2,59,615
- The ratio 15 / 26 represents 15 days out of 26 working days in a month i.e., An average of 30 days reduced by 4 Sundays is considered for calculation.
- Last drawn salary = Basic Salary + Dearness Allowance i.e., Basic + DA. Here we do not consider gross salary or net salary.
- So, years of service are rounded down to the nearest full year. For e.g., If the employee has a total service of 20 years, 10 months and 25 days, then you will receive the gratuity for 21 years.
- If an employee has a total service of 20 years, 1 month and 25 days, no. of years will be 20 years.
- The amount of gratuity cannot exceed Rs. 20 lakhs. If it exceeds that amount, it will come under as ex-gratia.
Is Gratuity Taxable?
Yes. Gratuity is taxable but only if it exceeds an amount of Rs. 20 Lakh. The taxable amount will be added to the total income under “others” category and tax will be calculated on income tax slab.
For e.g., If a person gets the gratuity of Rs. 15,25,742, then this amount is not taxable.
If a person gets the gratuity of Rs. 25,25,742, then, exemption will only be for Rs. 20 and Rs. 5,25,742 is taxable.
This ends our post. Also, if you have any doubts or queries kindly drop them in the comment section below.
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