Gratuity: The things you should know

Gratuity is a part of Gross Salary or say it is a part of CTC. It is a monetary benefit paid by the employer to thier employee when the employments terms end. Generally, it is paid at the time of retirement, death of an employee, or when he leaves the company/organization.

In India, the Payment of Gratuity Act, 1972 provides the rules and regulations for gratuity. All employers covered in this act are mandatorily required to pay the gratuity to their employees but other employers who are not covered in this act may also choose to pay gratuity to their employees. This act covers employees that were engaged in factories, mines, oil fields, plantations, ports, companies, and establishments with over ten employees. Once the Act becomes applicable to an employer, it will be applicable forever even if the number of employees goes below 10, gratuity is still applicable.

Condition for receiving Gratuity

Payment of gratuity is allowed only in the following situations:

• When an employee resignation from his service after completion of at least five years in service with that employee.

• On superannuation (means an employee who attains the age of retirement is said to be in superannuation)
• At the time of retirement or
• On death or disablement due to accident or disease (the time limit of 5 years shall not apply in the case of death or disablement of the employee)

Payment of Gratuity

Gratuity is paid in the above condition to the employee at the time of leaving the company or to the legal heirs/nominee of the employee in case of the death of the employee. In case the nominee is minor then the payment is made to the assistant labor commissioner who invests the gratuity amount into a term deposit with the name of the miner until the time that he or she becomes a major.  Application for payment of gratuity can be filed with the employer before or after 30 days from the date of eligibility. However, delay if any, with valid reasons can be accepted.

Taxability of Gratuity

Gratuity is taxable under the income head “Salary” in the year of receipt. However, an exemption has been provided under section 10(10) of the income tax act. Following is the way of calculation of Exempted amount:

1. Employee Covered under Payment of Gratuity Act:

•  Amount of Gratuity Actual Received
• Rs 20 Lakh
• (Number of year of service (rounded off) X Monthly Salary (Last drawn Basic salary plus DA) X15)/26

Illustration: The last salary drawn by Rachna is Rs. 50,000 per month (basic + DA). She received a gratuity of Rs. 15 Lakhs. She served for the last 17 years and 6 months.

2. Employee not Covered under Payment of Gratuity Act:

• Amount of Gratuity Actual Received
• Rs 20 Lakh
• [Number of year of service (excluding fraction of years) X Last 10 month’s average salary (basic + DA)/2

Illustration: The last salary drawn by Sohan is Rs. 50,000 per month (basic + DA). He received a gratuity of Rs. 15 Lakhs. He served for the last 17 years and 6 months.

3. Gratuity received by a Government Employee:

Gratuity received by a Government employee at the time of death or retirement is fully exempt from tax. Here, Government employee includes Center/State Government employees, Employees of local Authorities and universities set up under an act of parliament or state legislature including its affiliated College but not include the employees of a statutory corporation.