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Gratuity

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HR Glossary

Gratuity

There are some rights given to every employee in India by the Govt. of India. These rights are usually related to the retirement plans for the employees to make their frail days economically stable.

One of these rules is Gratuity. Let’s discuss what is gratuity and how it works.

What is gratuity? 

It is a lump sum money provided to an employee when they leave the organization for the services provided by them during the period of employment by their employer. 

For the companies covered under the Gratuity Act, this benefit is paid when an employee has served the employer for five years in the private sector and ten years in the public sector. An employee gets their gratuity when they resign, are laid off or retires. 

How is gratuity calculated?

The amount of gratuity calculated depends upon the tenure of service and basic salary. 

The formula for calculation is:

Gratuity = (basic salary + dearness allowance) x Number of years completed of service * 15/26 

As per this formula, the time period of 6 months or more is considered as one year.

For example, if someone completes seven years and five months of service, then the number of years is considered as 11 years for the calculation. Similarly, if a service period is five years and six months for the calculation, it will be considered six years.

What are the eligibility criteria to receive gratuity? 

An employee is eligible for gratuity if they fulfill the following criteria:

  • The employee must have resigned from the job after continuous employment with the organization for at least 5 years.
  • It is earned in case of the death of an employee or if they become disabled due to some sickness or accident.
  • The employee must be eligible for a pension.
  • They should have retired from the job.

Taxation rules on gratuity in India

The maximum amount that comes under tax-exempt in gratuity applies to an employee’s entire career. Therefore, during a person’s entire working life, the tax-exempted gratuity amount that can be claimed cannot exceed Rs. 20 lakh in total from one or more employers currently.

The Taxable gratuity calculator can also be used to calculate how much tax must be paid by an employee on a particular amount.

We hope this article helped you. For more interesting articles;

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