Gratuity is a type of retirement benefit that is paid by an employer to an employee for their services rendered. The amount of gratuity depends on the employee’s length of service and the last drawn salary. In this blog, we will explain gratuity in the simplest way possible.
What is Gratuity?
Contents
Gratuity is a lump sum amount that an employer pays to an employee as a token of appreciation for their services rendered. It is a retirement benefit that is payable when an employee completes at least five years of continuous service with an employer. Gratuity is paid by the employer to the employee, and it is not deducted from the employee’s salary.
Who is Eligible for Gratuity?
Gratuity is applicable to all employees who have completed five years of continuous service with an employer, including those who are retiring, resigning, or passing away. However, gratuity is not payable to employees who have been terminated due to their misconduct or have left the organization without serving the notice period.
How is Gratuity Calculated?
Gratuity is calculated based on the length of service and the last drawn salary of the employee.
Gratuity = (Last Drawn Salary x 15 x Number of Years of Service) / 26
In this formula, the last drawn salary refers to the basic salary and dearness allowance. The number of years of service is calculated as the total number of completed years of service, rounded off to the nearest full year. The fraction of the year is ignored.
For example, if an employee has completed 10 years and 7 months of service and the last drawn salary is Rs. 50,000 per month, the gratuity amount would be calculated as follows:
Gratuity = (50,000 x 15 x 10) / 26
Gratuity = Rs. 28,846.15
In this case, the total number of completed years of service is 10, and the fraction of the year (7 months) is ignored.
When is Gratuity Payable?
Gratuity is payable to an employee when they retire, resign, or pass away. If an employee resigns before completing five years of continuous service, they are not eligible for gratuity. However, if an employee passes away before completing five years of service, their nominee or legal heir is entitled to receive the gratuity amount.
It is important to note that gratuity should be paid within 30 days from the date it becomes payable. If the employer fails to pay the gratuity amount within this period, they are liable to pay interest on the amount due.
Know more: Is gratuity amount taxable for private employees?
Tax Implications of Gratuity
Gratuity is tax-free up to a certain limit, as per the provisions of the Income Tax Act, 1961. The limit for tax-free gratuity is currently Rs. 20 lakhs. Any amount received as gratuity above this limit is taxable as per the employee’s income tax slab.
Conclusion
Gratuity is a retirement benefit that is payable to an employee who completes at least five years of continuous service with an employer. The gratuity amount is calculated based on the length of service and the last drawn salary of the employee. It is payable to employees who retire, resign, or pass away, and it should be paid within 30 days from the date it becomes payable. Gratuity is tax-free up to a certain limit, and any amount received above this limit is taxable as per the employee’s income tax slab.
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