All About Gratuity

It’s sure that you would have come across a word often in the employment world – ‘Gratuity’. It’s also sure that many of you do not know what it is. This is an attempt by us to explain about Gratuity, to the best of our knowledge and information.

What is Gratuity?

Gratuity is a post-employment benefit for the employees. Post-employment benefits are employee benefits (other than termination benefits) which are payable after the completion of their employment.
In consideration of the services rendered by the employees, an employer is obliged to offer benefits during their employment and even after the employment is terminated.
You might ask here ‘Why’? Well, it is one of the advantageous points that organisations use to attract employees and to retain them for a consecutive and considerable period of time. It is obvious that when a person looks at the offer which provides post-employment benefits, he/she would be interested in joining the organisation.

Eligibility for Gratuity benefits:

Gratuity shall be payable to an employee on the termination of his employment after he/she has rendered continuous service for not less than five years (or for other duration which the respective employer thinks appropriate for his/her organisation, but subject  to the approval of the concerned authority).
However, if the employment ceases due to death or disablement, this clause is exempted, it means that Gratuity can be claimed in those cases even if the services are not rendered for more than five years. In case of death of the employee, gratuity payable to him/her shall be paid to his/her nominee or, if no nomination has been made, to his heirs, and where any such nominees or heir is a minor, the share of such minor, shall be deposited with the controlling authority who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed, until such minor attains majority.
Max. Gratuity payable under the Act is Rs.3,50,000/- (w.e.f. 24-9-1997).

Calculation of Gratuity remittance under Payment of Gratuity Act, 1972:

For every completed year of service or part thereof in excess of 6 months, the employer shall pay gratuity to an employee @ 15 days’ wages based on the rate of wages last drawn by employee concerned.
As a formula,
Last drawn wage  X  No. of years of services completed  X  15 / 30
‘Wage’ here is defined as ‘Basic + Dearness Allowance’
For example, IF Mr. X serves an organization for 6 years and 7 months and his last drawn wage is 15,000, then the gratuity is calculated as follows:
Rs. 15,000 X 7 years X 15 / 30 = 52,500
Thus Mr. X will receive Rs. 52,500 as gratuity post retirement, which is completely tax-free as it is within the ceiling of Rs. 3,50,000.

Calculation of Gratuity remittance for Private Sector and Statutory corporations:

For every completed year of service or part thereof in excess of six months, the employer shall contribute gratuity to an employee at the rate of fifteen days’ wages based on the rate of wages last drawn by the employee concerned.
In the case of a monthly salary earning, the fifteen days’ wages shall be calculated by dividing the monthly rate of wages last drawn by him by twenty-six and multiplying the quotient by fifteen.
‘Wage’ here is defined as the average ‘Basic + Dearness Allowance’ for the last 10 months including the month of resignation:

Formula for calculating Gratuity:

Number of years of service  X  Last salary drawn  X  15 / 26

For example,
IF Mr. X serves an organisation for 6 years 7 months and his last drawn salary is Rs.15,000 (for the last 10 months), then the gratuity is calculated as follows:
No.of Years served for six months or less to be ignored and more than six months to be counted as full year. Here, Mr. X has served 6 Years and 7 months, so we can consider it as 7 years while calculating the gratuity i.e. 7 Years
Rs. 15,000 X 7 years X 15 / 26 = Rs. 60,577/-
Thus Mr. X will receive Rs.60,577/- as gratuity post retirement from his organisation.

Tax Exemptions for Gratuity:

Gratuity received by employee on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment or any gratuity received by his widow, children or dependents on his death is exempt to least of the following:

1.  Actual gratuity received
2. Aggregate amount of ½ months’s salary for each year of completed service calculated on the basis of the average salary for 10 months immediately preceding the month in which such events occur
3. Or Rs.3,50,000/-

Provided further that where any such gratuity or gratuities was or were received in any one or more previous year also, the exemption shall not exceed Rs.350,000, as reduced by the amount not included in the total income in any such previous year or years.

Hope the above explanations and examples provide good clarity and insight about Gratuity.

For any queries about Gratuity, pls contact us at info@cogzidel.in and we shall be glad to answer the same.

Your feedback and suggestions are most welcome.

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