GRATUITY IS A SMALL MONETARY GIFT GIVEN IN APPRECIATION FOR GOOD SERVICE. FOR EXAMPLE : A CASH GIFT GIVEN UPON RETIREMENT.
Gratuity is a lump sum amount paid by the employer to the employee as a token of appreciation for the services they have provided towards the company.
Gratuity payment is retirement benefit like the provident fund or pension , intended to help them after retirement ,whether the retirement is the result of superannuation or physical disability. General principal behind gratuity is that the length of the service of the workmen is to be considered to claim a certain amount as a retrial benefit, and it is given by the employer to an employee for the services rendered by him or her during the period of employment. Gratuity act name is The Payment of Gratuity, 1972 (Rules and Act).
Gratuity Act applies to industries and organisations all over India in case employer having 10+ working employees and every employer shall be Gratuity to eligible employee as follow the rules that why it’s also called statutory compliance.
Who is eligible for gratuity?
Gratuity payment eligibility comes after the employee has completed a minimum of 5 years and Gratuity payment to employee at the time of leaving, retiring (58 years) or is dead. A person is eligible to receive gratuity only if he has completed five years of service with an organization. These five years must be continuous and there should not be any gap in the services of the employee with that company.
Employee who has completed 5 years of continuous service with a single employer is eligible for gratuity payment but this payment will be paid by employer when employee shall left the organization. Gratuity services period shall be calculate from date of Joining (DOJ) to last day of working (DOL) without reducing maternity leaves and any other loss of payment or LWP days. The following rules apply to the calculation of 5 years as continuous service:-
| Years and Month | Employer Week Days Working |
|---|---|
| 4 Years and 8 months (240 Days) period shall be count as 5 Years [Case Study, judgement Copy] | Where, 6 days working in a Week. |
| 4 Years and 190 Days period shall be count as 5 Years [Case Study, judgement Copy] | Where, 5 days working in a Week. |
| In case, the employee has completed 6 months after eligibility of gratuity then 6 months tenure would be counted as a year. | FOR ALL |
Change in gratuity rules According to the New Wage Code Bill 2021, employees will be entitled to gratuity even if they have been employed for just one year. However, right now, employees are getting gratuity after five years of continuous work in the same company.
WHAT IS GRATUITY IN SALARY?
Gratuity is the monetary amount which is payable to the employee of an organisation under the Payment of Gratuity Act 1972. This is mainly paid to the employee as a token of appreciation for his/her services towards the company. Gratuity payment is one of the several components that make up the gross salary of the employee.
However, an employee is eligible to receive the gratuity amount only after they complete a period of 5 or more years with the company. It is generally a token amount paid by the company showing gratitude towards the employee for their services towards the organisation.
How to calculate Gratuity ?
Gratuity calculation for monthly rated, piece rated and seasonal employees under Payments of Gratuity Act 1972: Payment of Gratuity is a ‘Defined benefit’ provided to an employee as a lump sum, on his retirement. To put it simply, gratuity is the money given to an employee in recognition of his services as a parting gift. The provisions of payment of gratuity are governed by the Payment of Gratuity Act 1972. The maximum amount of gratuity that can be paid to an employee is Rs 20 lakh. The employer can, however, pay more gratuity than the prescribed ceiling. The payment of gratuity is made either to the employee at the time of his retirement, or termination or to the legal heir in case of death of the employee.
TAXATION RULES ON GRATUITY
The taxation rules on gratuity depend on the type of employee who is receiving the gratuity.
1. The amount of gratuity received by a government employee is exempt from the income tax.
2. Any eligible private employee of an employer who is covered under the gratuity act gets tax exemption on a certain amount of salary.
- ₹20 lakh
- The eligibility criteria
- The actual amount of gratuity received
FORFEITURE IN GRATUITY – The employer is allowed to forfeit the grauity in case following offence is committed during the employment:-
His/ Her lawless act.
Violent behavior
Any disorderly conduct.
Any offense involving moral turpitude.
The Payment of Gratuity Act 1972 doesn’t apply to central or state government employees and other employees covered by any other act for Gratuity payment. The “Employee” under the Payment of Gratuity Act 1972 means any person employed on wages for doing any type of work, including those hired in the managerial or administrative capacity. The key consideration for gratuity payment is that the person should be employed on wages. Those employed as apprentices are not eligible for gratuity.
#Gratuity calculation formulas
Gratuity payment always calculate for year(s) NOT FOR MONTHS AND DAYS and Gratuity will be calculate on last month’s salary. Last month salary means, Last month Basic Salary + DA. It also called Gratuity Salary or Gratuity Wage.
Gratuity Calculation Formulas = Last Drawn Monthly Salary / 26 x 15 x Number of years of service completed.
1 Year Gratuity amount equal to 15 days monthly Basic Salary means. Calultion
The gratuity under the Payment of Gratuity Act, 1972 is calculated as 15 days’ wages for every completed year of continuous service, based on the last drawn salary. Thus, the gratuity calculator formula as percentage of salary works out to be:
Total Gratuity Payable = (Last Drawn Monthly Salary) x (15/26) x (Number of years of service completed).
For example, if you joined service in 2013 and resigned in 2018 with a monthly salary of Rs. 50,000 (in 2015), your gratuity will be calculated as follows: – (15/26* Rs. 50,000)*5 = Rs. 1,44,230.
Note: Although there are 30/31 days in most months of the year, the number of days in a typical work month specified under the Payment of Gratuity Act, 1972 is 26 days. Thus, 26 days is used in the formula for calculating gratuity
Maximum limit of the gratuity payment is 20 lacs (2000000). This limit for an Employer as per Gratuity Act. Same time, Gratuity payment is non taxable income in hand of employee and tax free gratuity payment limit is also 20 lacs (2000000) but this limit for overall period of employments in Private Sector.
GRATUITY FORMS
FAQs on Gratuity Payments
Ques: When can an employee ask for gratuity?
Ans: An employee can ask his/her employer for the payment of gratuity upon completion of 5 continuous years of service.
Ques: Which salary is considered while calculating gratuity?
Ans: While calculating gratuity, the last drawn salary of the employee is taken into consideration.
Ques: How much amount of gratuity is free from tax liabilities?
Ans: During the entire working career of an employee, the maximum that is exempt from any tax deductions is Rs.20 Lakh
Ques: What is the formula for calculating gratuity?
ns: Gratuity can be calculated using the formula- (15 * last drawn monthly salary * tenure of working) divided by 26; where 26 is taken as the number of working days per month.
Ques: How much percentage of gratuity will I receive monthly?
Ans: An employee can receive a maximum of 57.69% of the monthly salary as gratuity. To know the exact amount of gratuity, you can use the Gratuity calculator.
Ques: Can an employer give excess gratuity to the employee?
Ans: Yes, an employer can give excess gratuity to an employee. However, this excess amount will be a part of the employee’s taxable income.
Thanks for Reading.
Rupa Banerjee – Payroll Editor
Email: rupabanerjee70@gmail .com