Do you read your offer letter and see you have the benefit of gratuity but however when you see your salary slip, nothing is mentioned in it? In this article, we will understand all the aspects related to gratuity.
What is gratuity?
After having served your employer for five years or more you become entitled to a payment called “gratuity". This is a lump-sum tax-free benefit that you are entitled to when you leave for another job or retire. The gratuity amount is totally paid by the employer without any contributions from the employee.
What are the eligibility criteria to receive gratuity?
Here is the list to check if an employee is eligible to receive the gratuity amount from the employer or not:
- You should be eligible for superannuation
- You should resign after working for five years with a single employer
- You should retire from work
- In case of any disability or pass away due to accident or illness
The formula for calculating gratuity
- Income tax department website- You can go to www.incometaxindia.gov.in website. Look for the 'Tax Tools' option. Now, search Gratuity from the available options. The given calculator will compute the amount of gratuity paid with respect to the input values such as assessment year, type of employer, gratuity received exempted gratuity and taxable gratuity.
- Check with your employer- Your employer or the HR of the organization keeps the complete information of all the employees. One can approach his or her HR regarding the gratuity balance or amount.
- Formula to calculate gratuity yourself- The formula is 15 X (last drawn salary) X (tenure of working)/26. For instance, employee X's last drawn salary is 50,000 per month and has worked with ABC ltd company for about 30 years. So, his gratuity will be calculated as: (15 X 50,000 X 30)/26= Rs 9,37,500. In this formula, the time period of more than six months is considered as one year.
However, an employer can choose to pay more gratuity to an employee. Also, for the number of months in the last year of employment, anything above 6 months is rounded off to the next number while anything below 6 months in the last year of employment is rounded off to the previous lower number.
Income tax on gratuity
The taxation rules around gratuity amount primarily depend on whether an employee is employed with a government or a private entity.
- For (central/ state/ local) government employees, the entire gratuity amount is exempted from income tax.
- For private employees, the least of the following three amounts is exempted from income tax:
- a) The eligible gratuity
- b) The actual amount of gratuity received
- c) Rs. 20 lakh
FAQs on Gratuity
1. If I resign from a company after 4.5 years of service, am I eligible for gratuity?
No, you have to serve at least 5 years in a company to get gratuity payment. It is best to check with the HR of your company about this. However, if someone dies while in service, the gratuity amount will be paid to their legal heir even if they have not completed 5 years of service. In addition, the amount received by a nominee/heir will not be taxed.
2. I am a contract employee in a company. Will I get gratuity if I resign or retire after 5 years?
If you are on the company rolls and are considered an employee of the company, then you will receive gratuity. However, if you are under a contract that is separate from the company then the gratuity should come from the contractor and not the company.
3. Can I see gratuity in my salary slip? Is it included in my monthly salary?
Gratuity is a monetary benefit given by the employer, but not paid as part of the regular monthly salary nor is it included in your salary slip.
4. What kind of employees does the Gratuity Act, 1972 cover?
Payment of Gratuity Act, 1972, applies to employees of factories, mines, oilfields, plantations, ports, railway companies, shops, or other establishments related to them. All kinds of government jobs have also been included under the purview of this act. It is applicable in all states of India except Jammu and Kashmir.
5. Is there any difference in the calculation of gratuity for employees who are not covered under the Gratuity Act?
Even if you are not covered by the Gratuity Act, your employer may pay you gratuity. The calculation for this is: Gratuity = Average salary (basic + DA) * ½ * Number of service years. In this case, the service years are not rounded off to the next number. So if you have a service of 12 years and 10 months, you get gratuity for 12 years and not 13 years.
6. Is there a cap to the amount I can receive as gratuity?
Yes. A company cannot pay you more than Rs.10 lakh as gratuity, irrespective of the number of years you have completed. This limit is also applicable to gratuity you can receive from different employers during your lifetime. If your company wishes to pay you more money, they can title it under ex-gratia or bonus.
7. How do I nominate someone to receive my gratuity in case of my death?
To nominate one or more heirs for your gratuity amount, you need to fill in Form F when joining a company.
8. How many days will it take for the employer to remit the gratuity amount?
Usually, gratuity is released along with or just before/after your full and final settlement is done. The government mandates employers to pay the amount within 30 days. If there is any delay in payment, the employer has to pay simple interest on the amount from the due date until the date when payment is made.
9. How much time does an employer take to release the gratuity amount? As per government norms, an employer has to pay the gratuity amount within 30 days from the full and final settlement of the employee. If the deadline is missed, the employer will have to pay the gratuity amount plus interest incurred on it from the due date to the actual payment date.