Out of various different components of the gross income of an employee, Gratuity is one. It is basically an advantage that is payable as per the Payment Gratuity Act that was passed in the year 1972.
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It is an amount that is paid by an employer to his/her employee in return of the services given by him/her to the company. However, the benefit of gratuity is offered to those employees who have been associated with the company for a minimum of five years. In this way, gratuity can be perceived as a gesture of gratitude by a company towards its employees against the services.
Mentioned below are the gratuity rules:
The basic three steps that are involved in the payment of gratuity are:
An authorized person has to send an application to the employer regarding the gratuity payment.
As soon as the company that owns gratuity receives an application, starts calculating the gratuity. With this, the company also provides notice for the same to the Gratuity seeking employee and the controlling authority with the specification of gratuity amount.
The employer, after sending the acknowledgment gets the time period of 30 days for paying the amount of gratuity to the employee.
As per Payment Gratuity Act 1972, an employer may forfeit the gratuity payment of the employees, either partially or wholly despite he/she has completed five or more years in the service of the company. However, the only time where this situation occurs is the termination of the employee because of undisciplined conduct in which he/she has tried to physically harm the individuals during employment.
The gratuity law as per the policy changes made in the budget year of 2016 are:
As per the Article 10 (10) I of the Online Income Tax, the gratuity payment received by a government employee except for the statutory corporation, is completely exempt of tax.
As per Income Tax Act’s Article 10 (10) ii, the death or/ and retirement gratuity receivable by an individual who is covered under the Gratuity Act 1972 is considered as the minimum amount of the below mentioned that is exempted from the tax:
(*15/26) X Salary last drew**X Number of service years completed or its some part in excess of six months.
The actual received gratuity amount.
Where - * 7 days if one is an employee of some seasonal establishment.
** The amount of salary to the complete salary got by an individual considering the Dearness Allowance and excluding the other benefits such as bonus, HRA, commission, and other perquisites.
As per the Income Tax Act’s Article 10 (10) iii, all the exemption for gratuity payment received by an employee who does not get coverage under Gratuity Act 1974 are:
Salary of half month * X Service years completed
Where *Average Salary = Average Salary of last ten months immediately after the month of retirement.
To get the gratuity payment, an individual needs to fulfill the below criteria:
An individual should qualify for superannuation
An individual must have retired from his/her job.
An individual has resigned from the services of the company after remaining employed with it for at least five years.
In case of the death of the individual, or if one has become disabled due to some accident or sickness.
An employer can provide the gratuity to his/her employees from his/her own pocket or can buy a group gratuity plan from an insurance provider. For group plans, the employer needs to pay the annual contribution to the insurance provider. Moreover, an employee also can contribute to the gratuity amount. The gratuity that is paid by the insurance provider is as per the of the group insurance plan.
The components and the formula to calculate gratuity is given below. The amount of gratuity also depends upon the years for which an individual has served a company and his/her last drawn income.
If, N = Years (number) x that one serves in a company
B = Last drawn salary (basic) with DA
Gratuity = N*B*15 / 26
To understand the calculation of gratuity, let us take an example. For example, Sumit is a software engineer and is working for an IT firm. In his 20 years of employment with the same organization, Sumit has had previous month’s basic salary plus DA salary as Rs.25, 000. In this case, the gratuity amount that Sumit will get is:
Gratuity amount for Sumit = 20*25, 000*15 / 26 = Rs. 2, 88,461.54
However, an employer may pay more gratuity to his/her employees, however, the amount of gratuity cannot exceed than Rs. 10 Lakhs as per the Gratuity Act. Any amount that is more than Rs.10 Lakh is considered as ex-gratia and is voluntarily given and is not enforced as per the law.
Moreover, anything that is more than six months is rounded off to the next number whereas anything that is below six months of the previous year of the employment is adjusted to the lower number of the previous month. In this way, anyone who has served his/her job for 6 years and 7 months would be entitled to get the gratuity of 7 years. On the other hand, a job held for 6 years and 4 months will get the gratuity of 6 years.
Mentioned below are some of the most significant points of gratuity:
An employee can get the gratuity of a maximum of Rs.10, 00, 000. In this case, the tax exemption will be calculated as per the points listed under taxation.
In the situation of the death of an employee, the heir or nominee of the employee gets the gratuity.
The employer always has the right to reject the gratuity payment, in case of the termination of an individual due to some misconduct.
The taxation for gratuity payment depends on the employee who is getting the gratuity payment. There are three cases that arise in this situation:
If an employee is central or state government or local authority's servant and getting the gratuity from his/her employer, then he/she gets a full exemption on the income tax.
In this case, the minimum of the below amounts are exempted from the tax:
Actual gratuity got by an employee
Salary of half month of every service year that the employee has finished with the employer.
The following gratuity amount is exempted from the salary of an employee in this case:
Salary of 15 days according to the last drawn salary of an individual.
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