Gratuity is a monetary benefit provided by employers to employees as a token of appreciation for their loyalty and dedication. Governed by the Payment of Gratuity Act, 1972, it is mandatory for companies with 10 or more employees to offer gratuity.
This benefit is provided to employees who:
- Have completed a minimum of five consecutive years of service.
- Leave their job due to resignation, retirement, or termination.
- Are incapacitated due to an accident or illness (exceptions apply).
Eligibility Criteria for Gratuity
To qualify for gratuity, employees must meet specific criteria:
- Service Duration: Minimum of 5 consecutive years. However, exceptions exist under:
- Death or Disability: Gratuity is paid irrespective of tenure.
- 4 Years and 240 Days Rule: In certain cases, employees with 4 years and 7 months of service may qualify.
- Absenteeism: Absences due to strikes, lockouts, or medical leaves are usually included in the calculation.
Exceptions:
- In Case of Death: Gratuity is paid to the nominee or dependents.
- Disablement: If an employee becomes disabled, gratuity is payable before completing five years.
Gratuity Calculation Formula
Gratuity is calculated using the following formula:
Gratuity=(15×Last Drawn Salary×Years of Service)/26\text{Gratuity} = \left( \text{15} \times \text{Last Drawn Salary} \times \text{Years of Service} \right) / 26
- Last Drawn Salary includes Basic Salary and Dearness Allowance (DA).
- Service exceeding 6 months is rounded up to the next year.
Example:
An employee with a last drawn salary of ₹50,000 and 10 years of service will receive:
Gratuity=(15×50,000×10)/26=₹2,88,461\text{Gratuity} = \left( 15 \times 50,000 \times 10 \right) / 26 = ₹2,88,461
Tax Implications on Gratuity
Gratuity received is taxable under certain conditions, depending on the type of employment:
1. Government Employees
Gratuity is entirely exempt from tax.
2. Employees Covered Under the Payment of Gratuity Act
Tax exemption is available for the least of:
- 15 days’ salary for each completed year of service.
- ₹20,00,000 (current tax exemption limit).
- Actual gratuity received.
3. Employees Not Covered by the Act
Exemption is calculated as:
- Half a month’s average salary for each completed year of service.
- ₹20,00,000 or actual gratuity received, whichever is lower.
Key Points to Note
- Gratuity received during employment is fully taxable.
- For retirement or termination cases, partial exemptions apply.
- Tax liability can be minimized by proper planning and utilizing exemptions effectively.
| Employment Type | Taxability |
|---|---|
| Government Employees | Fully exempt |
| Covered Under Gratuity Act | Least of ₹20 lakh, 15 days’ salary/year, or actual amount received |
| Not Covered Under the Act | Least of ₹20 lakh, ½ month’s average salary/year, or actual amount received |
Frequently Asked Questions (FAQs)
- What happens if an employee dies during service? The nominee or dependents receive gratuity without the five-year requirement.
- Can gratuity be denied? Gratuity can only be denied in cases of termination due to misconduct.
- Is gratuity part of CTC? Yes, many employers include gratuity as part of the Cost-to-Company (CTC).
Conclusion
Gratuity is not just a statutory obligation; it reflects an employer’s gratitude for an employee’s service. By understanding gratuity rules, employees can ensure they receive the rightful benefit and optimize their tax liabilities.
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Disclaimer:
This article provides general information about gratuity and tax implications. For personalized advice, consult a financial expert or legal advisor.
