What is Gratuity in a salary: Calculation and Eligibility

Loyalty is rarely unrewarded. If you stay invested long-term, many investment instruments can earn returns and help you build a wealth corpus. Similarly, if you stay with one employer for years, the employer may provide several benefits as a token of appreciation. If you are awarded monetary benefits, it is called gratuity.

Although gratuity is a familiar term, some confusion still exists. For example, many wonder if employers are required to pay gratuity or if it is optional. Does the employer pay gratuity out of their own pocket, or is there an employee contribution? Let us find out.

What is Gratuity
 

Gratuity is a monetary reward given by employers to employees as a token of appreciation for their long-term service. Governed by the Payment of Gratuity Act, 1972, gratuity is a legal obligation for employers in India.

In essence, gratuity represents a financial thank-you for an employee's dedication and loyalty. Employers typically pay gratuity either directly from their funds or through a gratuity insurance plan. In the latter case, an insurance company disburses the payment when the employee qualifies.

To be eligible for gratuity, an employee must complete at least five years of continuous service with the same employer. This benefit is also provided in cases of retirement, resignation after the stipulated period, or unfortunate events like the employee's death or disability.

Gratuity enhances an employee's retirement planning, offering a lump-sum amount upon completing the required service period. This payment reflects the employer’s recognition of the employee’s valuable contribution.

How Gratuity Works?

When an employee joins a company, they are automatically enrolled in the organization’s gratuity scheme. The employer either contributes directly to this scheme or collaborates with a life insurance company to manage it. Upon completing the required years of service, the employee receives a one-time lump-sum payment. If the employee leaves before meeting the eligibility criteria, they forfeit the gratuity.

Eligibility Criteria for Gratuity
 

- Continuous Service: Completion of at least five years with the same employer.

- Retirement or Superannuation: Eligibility upon retirement or superannuation.

- Resignation: Leaving the organization after fulfilling the five-year requirement.

- Death or Disability: Payment to the employee’s nominee if they pass away or suffer a disability.

Is Gratuity Taxable?

"Is gratuity taxable?" is a common question many employees have. Gratuity received is considered part of your income and is taxed accordingly. For example, if your salary is ₹6 lakh per annum and your gratuity is ₹1.5 lakh, your income for that year will be considered 7.5 lakh. You will be taxed according to the income slab or tax bracket you fall into.

Government employees receive gratuities exempt from income tax. However, taxes apply when a nominee gets the death-cum-retirement gratuity after an employee's passing. Private company employees are exempt from gratuity income tax subject to limitations.

Calculating gratuity
 

Formula for calculation: Gratuity amount = Gratuity=Y×S× 15/26

Y = Number of years of service

S = Last drawn salary (basic salary + dearness allowance)​

For instance, suppose you have worked in a company for five years, and your last drawn salary is ₹50,000. After calculating gratuity, you should get:

Gratuity amount = Y S 15/26

= 5*50000*15/26

= ₹1.4 lakh

Maximum limit on gratuity amount

The maximum gratuity cannot exceed ₹20 lakh. Any amount above this is considered ex-gratia, which is voluntary and not legally enforced.

While companies can give employees a higher gratuity amount, it cannot exceed ₹10 lakh. If it exceeds this limit, it is considered ex-gratia, which means it is entirely voluntary and not imposed by law.

To simplify gratuity and financial planning, you can also use a gratuity calculator online. Just input the critical data, and the calculator does the math. Key inputs include: 

• Employment period - It's vital to record exact years and months of service for precise calculations.
• Monthly salary - Input your final salary. This figure typically combines basic pay and daily allowance (DA).
• Commission on sales - For those earning sales incentives, it's crucial to add this monthly sum.

After inputting all these details, the calculator presents an estimated gratuity amount, revealing what you can anticipate from your employer.

Gratuity rules
 

In India, gratuity on salary becomes payable when an employee ends his employment after continuous service of at least five years. This payment occurs upon superannuation, retirement, resignation, or due to an employee's death or disablement in an accident or disease. Notably, the five-year requirement does not apply in cases of death or disablement.

For situations involving death or disability from accidents or illness, the nominee or legal heir receives the payment. If this nominee stands as a minor, the assistant labour commissioner invests the money in a term deposit in a nationalised bank until the minor reaches adulthood.

Employees eligible for gratuity can apply within 30 days of its payability. If they know their retirement or superannuation date, they may apply even earlier. A delay in application doesn't invalidate the claim, provided there's a genuine reason for the delay. The employer has an obligation to disburse the gratuity amount within 30 days of its payability.

For claims made by a nominee or heir, the employer might seek evidence or a witness to confirm the identity of the claimant or the authenticity of the claim. Upon receiving the evidence, the employer acknowledges the claim.

Conclusion
 

Gratuity in salary is a significant component ofin an employee's compensation structure. It is a testament to an employee's dedication and years of service. It signifies the employer's acknowledgment of the value that long-term employees bring. This financial token appreciates years of hard work and fortifies the employee's financial future. 

Speaking of securing your future, just as a gratuity amount strengthens future savings, proactive financial planning with reliable savings accounts is also beneficial. With an Metra Trust savings account, you can enjoy higher interest rates and significantly amplify your savings over time. Combined with unmatched convenience and the mobile banking app, it becomes the perfect financial companion. Its value-added features complement modern lifestyles and offer more than just a safe haven for your funds. 

Disclaimer

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