What is Gratuity? Who is Eligible & How to Calculate It?
Are you an employee in a company? If yes, then you should be aware of important employment benefits like regular salary, insurance, gratuity, time off, etc. In this list of benefits, gratuity is the least discussed topic among employees. Although it is an important compensation benefit for salaried individuals, its concept must be understood clearly. Therefore, here in this post, we will be discussing the ins and outs, including its significance, eligibility, rules, and calculation.
What is Gratuity?
Gratuity is a financial benefit that regular working employees receive from their employers in recognition of their long-term commitment to the organization. By extended service means, you can get the gratuity after a successful completion of five years with the company, or before in case of disability or death.
Governed by the Payment of Gratuity Act 1972, gratuity is something that an employer pays to an employee. It is a token of appreciation for their service to the company. Most importantly, the gratuity amount is an integral component of an employee’s gross salary and is deducted every month with a fixed amount.
Importance of Gratuity in an Employee & Who is Eligible?
Employers are legally required to provide gratuity as part of an employee’s compensation. A company is bound to pay a gratuity amount, calculated based on salary, to employees after the successful completion of five years. Here’s the list of rules:
- Gratuity is only applicable to companies that have more than 10 regular working employees within the organization.
- A salaried working individual has the right to receive the amount after completing five years in a company.
- The exception of five years lies with employees suffering from any disability or in case of death, to it before
- Employees can avail themselves its benefits upon resignation, retirement, disablement, or death.
Who is Eligible?
Here’s the list of eligibility conditions that every employee should be aware of. You will get the gratuity amount upon?
- Retirement from the service.
- Resignation from the service after completing five years with the same company.
- In case of sudden demise or suffering from an unexpected disability.
How to Calculate Gratuity?
Now comes another important part of the discussion, on how to calculate the gratuity amount. To calculate, follow this formula:
(15 *salary * number of years of service)/26
Here’s the formula breakdown:
- 15 means 15 days of wages per year.
- The last drawn salary indicates the basic salary of an employee in addition to the dearness allowance (DA).
- Figure 26 represents working days in a standard 30-day month, excluding Sundays.
To make this clearer, let’s break it down with an example.
Well, you can assume the fact that you have been working for a private firm for a period of 15 years.
And, you’re drawing a monthly salary of INR 30,000. So, according to the formula mentioned above, the amount will be
15 x 30,000 x15/26= INR 2,59,615.
Important Note: Here, the number of service years should be a minimum of 5 years, and it can go to the extent of 7 years, 8 years, 9 years, 10 years, and so on.
Specific Conditions to Follow
After understanding the eligibility, how the formula functions, and the legal rules, next step is to understand the process of applying for the amount based on the eligibility criteria.
- To get the amount, you must inform the employer and apply.
- Upon receipt of the application, the employer must acknowledge the same, calculate it, and process it.
- The amount of gratuity will be settled within 30 days after acknowledgement.
Is the Gratuity Amount Taxable?
The gratuity amount is fully taxable under the Income Tax Act 1961. The tax is applicable when an employee applies for it, and that too after the completion of at least five years in the same company. However, tax exemption is applicable when applying for gratuity in case of death or disability. Therefore, it is important to take professional advice from a taxation expert.
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Gratuity is an amount given to an employee for their dedication to a company, while working there for at least five years. As employees, you should be aware of the overall concept. If required, you must seek guidance from a taxation expert for better understanding and clarity. Let the professionals assist you so that you can receive what you deserve. It is the fair value of your work, so do not make any mistakes and utilise the full benefits.
