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Gratuity is the sum of money paid by an employer for the services rendered in the company by an employee. However, it is only applicable for employees completing 5 or more years in a company.
An employee needs to fulfil a few conditions in order to be eligible.
Gratuity Payment Act, 1972
The Payment of Gratuity Act prefaced in 1972 and it covers all the employees from different sectors of the society like factories, mining, companies, plantations etc. Any establishment with more than ten employees is eligible for gratuity payment. Unlike Provident Fund, Gratuity is paid by the employer in entirety and no share of it is paid by the employee.
How to Calculate the Gratuity Amount
If the number of years that you have served in the company is N and the last salary drawn by you from the company is B (inclusive of dearness allowance), then, the formula for Gratuity is NxBx15/26
If Payal has worked for 20 years in a company and the last salary drawn by her was 25,000, then the Gratuity amount for Payal would be,
An employer can decide to pay more gratuity to an employee and under the Gratuity Act, the limit is up to 10 lakhs. If an employee recieves a gratuity above 10 lakhs, it is called as ex-gratia and it is considered to be the voluntary contribution from the company.
How is Gratuity taxed?
The taxation amount on Gratuity depends on the employee. A Government employee is not liable to pay any tax on gratuity and the tax on Gratuity amount for any salaried individual is calculated from the process described below:
For a salaried employee who is covered under the Gratuity Act, the amount which adds up to their 15 days of salary is exempted from taxation.
For a salaried employee who is not covered from the Gratuity Act, the following three amounts are exempted from taxation:
The Payment of Gratuity Act 1972 states that an employer has the right to forfeit the Gratuity Payment, wholly or partially even if the employee has completed five years or more of service in the company. Such a situation arises when an employee has been terminated from the employment contract due to misconduct or any other legal issues against him.
The Gratuity Payment can be completed in three steps:
The authorized person must send the application to the Gratuity that the company owes to him/her
After the application is received, the amount of gratuity will be calculated by the company and a notice is sent out to the person who'll be receiving the gratuity and the controlling authority of the company
After the acknowledgment is sent, the company has to pay the gratuity amount within thirty days.
Points to Remember