Definition Gratuity is reward money for continuous service fora specified number of years of service. Gratuity ispaid to an employee, in addition to his salary, bonus,commission, etc., when he leaves the service of hisemployer....Gratuity is a lump sum payment made,based on the total service of an employee either onretirement or death. It is calculated as so manymonths pay with reference to his service.
EligibilityIt is governed under the Payment of Gratuity Act 1972.As per Sec 10 (10) of Income Tax Act, gratuity is paid whenan employee completes 5 or more years of full time servicewith the employer. ORGratuity is payable to an employee (nominee in case of death)who has rendered continuous service of 5 years or more atthe time of his termination of employment, superannuation,retirement or resignation.Completion of continuous service of 5 years is not necessarywhere the termination of employment is due to death ordisablement due to accident or disease.
ApplicabilityEvery factory, mine, oil plantation, port and railway companyEvery shop or establishment – if it employs 10 or morepersons in the preceding 1 year.To any other establishment – employing 10 or more persons.The Act does not apply to :Apprentices & persons who hold civil post under the central govt. orstate govt. 4
How does it work ?An employer may offer gratuity out of his ownfunds or may approach a life insurer in order topurchase a group gratuity plan.In case the employer chooses a life insurer, he hasto pay annual contributions as decided by theinsurer.The employee is also free to make contributions tohis gratuity fund. The gratuity will be paid by theinsurer based upon the terms of the group gratuityscheme.
ForfeitureGratuity may be forfeited wholly or partially in case anemployee has been terminated for:Any act, willful omission or negligence causing any damageor loss to, or destruction of, property belonging to theemployer;OrAct of riotous or disorderly conduct or any other act ofviolence on part of employee;OrAny act which constitutes an offence involving moralturpitude, in the course of his employment.
Tax obligations for GratuityThe gratuity received by the employee is taxableunder the head ‘Income from salary’.In case gratuity is received by the nominee/legal heir of the employee, the same is taxable intheir hands under the head ‘Income from othersources’. This tax treatment varies for differentcategories of individual assessees
Continued………..For the purpose of calculation of exemptgratuity, employees may be divided into 3categories –(a) Government employees and(b) Nongovernment employees coveredunder the Payment of Gratuity Act, 1972(c) Nongovernment employees not coveredunder the Payment of Gratuity Act, 1972
Continued………In case of government employees – they arefully exempt from receipt of gratuity.In case of non-government employeescovered under the Payment of Gratuity Act,1972 – Maximum exemption from tax is leastof the 3 below:(i) Actual gratuity received;(ii) Rs 10,00,000;(iii) 15 days’ salary for each completed yearof service or part thereof
Continued………Note: Here, salary = basic + DA + commission (ifit’s a fixed % of sales turnover). Completed year of service or part thereof’means: full time service of > 6 months isconsidered as 1 completed year of service; <6 months is ignored. Here, number of days in a month isconsidered as 26. Therefore, 15 days’ salaryis arrived as = salary * 15/26
Continued……..In case of non-government employees notcovered under the Payment of GratuityAct, 1972 – Maximum exemption from taxis least of the 3 below:(i) Actual gratuity received;(ii) Rs 10,00,000;(iii) Halfmonth’s average salary for eachcompleted year of service (no partthereof)
Note: Here, salary = basic + DA + commission (if it’s afixed % of sales turnover). Completed year of service (no part thereof)means: full time service of > 1 year is consideredas 1 completed year of service. < 1 year isignored. Average salary =10 months’ salary (immediatelypreceding the month of leaving the job)/10
Points to remember…….. Generally, only government employers give DA to their employees. The salary of the employee may differ over a period of time on account of change in basic, DA and/or other factors. In case gratuity is received from more than one employer during the previous year, maximum exemption allowed is up to Rs 10,00,000. Where employee has already claimed gratuity exemption in any previous year (s), the maximum exemption amount allowed for the current previous year i.e. Rs 10,00,000 will be reduced by the amount of deduction already claimed in the previous years. In case of an employee who is employed in a seasonal establishment ( not employed throughout the year), the gratuity exemption shall be for seven days wages for each season.
Gratuity Calculation Gratuity : 15/26* ( Present Basicsalary+DA)* (Nor. of years of service ) Here DA is applicable for govt. employees. 26 = taken as total working days in a month.
Gratuity Deduction…It is deducted at a rate of 4.81% from thebasic salary of the employee.Explanation : Since ..receivable Gratuity =15/26*( Nor. of Years of Service) ( BasicSalary)Rate of Gratuity per month = 15/26*1/12%= 4.81%