What is Gratuity
Gratuity is defined as "an amount of money given as a reward for service.. Gratuity means is compulsorily to be paid by an employer to his employee, in return for services offered by him. However, only those employees who have been employed by the company for five years or more are given the gratuity amount as per the Payment of Gratuity Act, 1972.
The employee can get the gratuity before five years if he/she gets disabled in an accident or due to a disease.
Gratuity Act is applicable to factories, mines, oil fields, plantations, ports, railways, motor transport undertakings, companies, and to shops and other establishments, Employing 10 or more workmen
The Act reamins applicable irrespective even if the number of employees goes below 10 in future
When Do You Get Gratuity
When you attend age of superannuation or your retire.
When you leave the job after completion of 5 years.
On your death or disablement.
How Much Gratuity Do You Get or How is Gratuity Calculated ?
Gratuity Formula:
(your last drawn basic salary plus DA) * (tenure of working) * 15 / 26
Remember ,
Salary includes only Basic Salary plus Dearness Allowance
Number of years has to be rounded off up to full year if you have worked for more than 6 months in a year or else to be rounded off down.
For Example :
You salary is Rs 1 Lakh per month which includes Basic Salary of Rs 60,000 and DA of Rs , 10,000 and Rs 30,000 other allowance. You have worked with company for 6 year and 7 months . Than gratuity you are eligible for :
Gratuity = Rs 70,000 X 7 Years X 15/26 = Rs 2,82,692/-
Maximum Gratuity, employer is liable to pay is Rs 20 Lakhs as per Payment of Gratuity Act
How Much Gratuity is Tax Free of Exempt from Tax (Section 10(10))
In case of Employees are covered under Payments of Gratuity Act than Minimum of the following amount will be exempt :
Last drawn salary (basic + DA) * number of years of employment* 15/26;
Rs. 20 lakhs ;
Gratuity Actually received
Thus, if analysed carefully , 100% of gratuity is tax free if it is received and calculated as per Payment of Gratuity Act Formulae
In case of Employees that are not covered under Payments of Gratuity Act than Minimum of the following amount will be exempt :
Last 10 month’s average salary (basic + DA)* number of years of employment* 1/2;
Rs. 10 lakhs
Gratuity actually received
For Whom 100% Gratuity is Tax Free
Gratuity received by the Employees of Central and State Government/local authority or Members of Civil Services is fully exempt and taxfree.
Retirement gratuity received by members of the Defence Service under the Pension Code Regulations, is entirely exempt from tax.
Points to Remeber About Gratuity Exemption
Limit of Rs 20 Lakh for Gratuity Exemption is limit for life time and thus if gratuity is received in different different years from different employers than the limit of Rs 20 lakh will be adjusted accordingly and reduced . Once Rs 20 Lakh limit is exhausted than any further gratuity income will be taxable.
To Gain Knowledge About Exempt Employee Allowance and Recommended Salary Structure please read here.
To Gain Knowledge About House Rent Allowance please read here.
To Gain Knowledge of Form 12BB and Tax Declarations please read here.
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