Gratuity is a benefit program instigated under the Payment of Gratuity Act, 1972. It is offered to employees who have served a company for 5 years or longer, payable upon retirement, separation, or beforehand, depending on the terms and condition of an organisation.
There is no pre-set percentage stipulated by the Government of India regarding the sum of gratuity; it primarily depends on factors like one’s service length and their salary. Any organisation with at least 10 employees at present or in the previous 12 months falls under this act and will remain under this provision until the number of employee falls below 10.
Calculation of gratuity
Gratuity is calculated according to the formula mentioned below –
(15 x last drawn salary x total number of years in that organisation) / 26
This formula is applicable for individuals who are covered under this act. However, the Government of India also allows this provision for individuals who work in an enterprise that does not comply with all the regulations. Although it is a lesser-known fact, every salaried individual should be well aware of the notion.
Take a look at some points everyone should know about gratuity calculation.
Who are eligible to receive the benefits?
As per Section 3 of the Payment of Gratuity Act, 1972, employees are to receive its benefits even if the strength goes below 10 persons at a later stage.
In this scenario, the sum will be completed as –
(15 x last drawn salary x total number of years in that organisation) / 30
Other than that, employees of a particular company working on foreign land are also eligible to receive its benefit. The total working years (for individuals both complying and excluded in this act) is calculated since one’s probation period. However, apprentices are not eligible for this benefit.
How long can an employer take to disburse the sum?
Employers are liable to pay the gratuity sum within 30 days from its due date. Not complying with this regulation will levy interest (as according to the current government directive) on the gratuity amount.
When is an employee is liable to receive the sum?
An individual is eligible to receive the benefit in the following scenarios –
1. Termination of employment after continuous service for at least 5 years.
2. In case of superannuation.
3. After retirement or resignation.
4. In case of death or disablement caused by any ailment or accident.
In case of death or disablement, employees are liable to receive gratuity even if they have not completed five years of service. If that individual faces untimely demise, the amount will be paid to his or her nominee or next of kin.
Is income tax applicable to this benefit?
The benefits received under this provision are exempted from income tax only if the employee is working with the Government of India. For private-sector employees, one will have to pay income tax according to the applicable slab.
What is the tax exemption threshold?
A total of Rs.20 lakh is exempted from the total gratuity amount as according to the revised regulations. This limit is also applicable for individuals who want to claim gratuity exemption multiple times, provided the total threshold does not exceed Rs.20 lakh.
Gratuity can be considered as a beneficial scheme, offering a substantial sum on the basis of the duration of service. Moreover, a beneficiary can also consider investing gratuity funds in an FD, which can help in asset accumulation over the years.
There are several financial institutions that offer such saving instruments at current FD rates to individuals. These include private and public sector companies, as well as NBFCs like Bajaj Finance which offers Fixed Deposits with attractive interest rates and assured returns guaranteed by industry leading CRISIL FAAA and ICRA MAAA ratings.
Gratuity offers a lump sum benefit to salaried employees post their retirement. It can be helpful to mitigate any financial requirement, and can even be invested in higher return schemes that can be availed to plan one’s post-retirement life.
Author Bio:
Gaurav Khanna is an experienced financial advisor, digital marketer, and writer who is well known for his ability to predict market trends. Check out his blog at HighlightStory