Gratuity- A Benefit on your Retirement

What is Gratuity?

Gratuity is a lump sum amount given by the employer to the employee for recognizing to the employee’s service. An employee gets gratuity at the time of retirement or leaving the job. The amount of gratuity depends only upon the time period of service and last drawn salary of the employee.

Applicability?

On employer

Every employer is bound to give gratuity amount to its employees if it employs more than 10 people.

On employee

Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years.

Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement.

(Disablement: means such disablement as incapacitates an employee for the work which he was capable of performing before the accident or disease resulting in such disablement).

When will it be paid?

Gratuity amount shall be paid to below-listed events:

on his superannuation, (means an employee who attains the age of retirement is said to be in superannuation) or
on his retirement or resignation, or
on his 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)

It cannot be paid as part of your regular monthly salary; it is only payable on the occurrence of any of the above events.

How much will you get?

For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days’ wages based on the rate of wages last drawn by the employee.

It is calculated according to this formula: Last drawn salary (basic salary plus dearness allowance) * number of completed years of service * 15/26.

Gratuity = Last drawn salary * 15/26 * No of years of service

Tax Treatment of Gratuity?

Gratuity amount is tax-free up to the limits prescribed in gratuity Act. Employer can pay more amount as gratuity but the excess amount paid would get taxable under Income tax act.

Forfeiture of Gratuity?

An employer can forfeit gratuity if an employee makes a loss to the company. The forfeiture would be to compensate the loss. However, the employer must terminate the services of the employee because of this damage.