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What is Gratuity?
Gratuity is a monetary benefit given by employers to employees as a token of appreciation for their long-term service. It’s a form of retirement benefit that provides financial security to workers after they leave their job due to superannuation, retirement, resignation, or death.
Legal Framework
In India, gratuity is governed by the Payment of Gratuity Act, 1972. This law makes it mandatory for employers to pay gratuity to eligible employees in organizations with 10 or more employees.
Eligibility Criteria
To be eligible for gratuity, an employee must have completed at least 5 years of continuous service with the same employer. However, in case of death or disability, the 5-year condition is waived.
Calculation of Gratuity
The formula for calculating gratuity is:
Gratuity = (15 * Last drawn salary * Number of years of service) / 26
Here, ‘salary’ typically includes basic pay and dearness allowance.
For example, if an employee’s last drawn monthly salary was ₹30,000 and they worked for 20 years, their gratuity would be:
(15 * 30,000 * 20) / 26 = ₹3,46,154 (rounded off)
Maximum Limit
As per current regulations, the maximum gratuity amount payable is ₹20 lakhs. This limit was increased from ₹10 lakhs in 2018.
Taxation of Gratuity
Gratuity received by government employees is fully exempt from income tax. For non-government employees, it’s exempt up to ₹20 lakhs under Section 10(10) of the Income Tax Act.
When is Gratuity Paid?
Gratuity is paid when an employee:
1. Retires
2. Resigns
3. Is laid off
4. Becomes disabled due to accident or illness
5. Dies (in which case it’s paid to the nominee)
The employer must pay the gratuity within 30 days from the date it becomes payable.
Forfeiture of Gratuity
An employer can forfeit the gratuity of an employee, either wholly or partially, if the employee’s services have been terminated due to:
1. Willful omission or negligence causing damage to the employer’s property.
2. Moral turpitude in the course of employment.
Importance for Employees
1. Financial Security: Gratuity provides a lump sum amount that can help in post-retirement planning or during job transitions.
2. Tax Benefits: The tax exemption on gratuity helps employees save on their tax liability.
3. Recognition of Service: It serves as a token of appreciation for the employee’s long-term commitment to the organization.
What Employees Should Know
1. Keep track of your employment duration and ensure your service records are accurate.
2. Be aware of your organization’s gratuity policy.
3. Nominate a beneficiary for your gratuity to ensure smooth transfer in case of your demise.
4. If leaving a job before 5 years, negotiate with your employer for ex-gratia payment in lieu of gratuity.
5. In case of any disputes regarding gratuity payment, you can approach the Controlling Authority appointed under the Payment of Gratuity Act.
Conclusion
Gratuity is an important component of an employee’s financial planning in India. Understanding its nuances can help employees make informed decisions about their career and retirement planning. It’s crucial for every Indian employee to be aware of their gratuity rights and how to claim them when the time comes.