2. Definition
Gratuity is reward money for continuous service for
a specified number of years of service. Gratuity is
paid to an employee, in addition to his salary, bonus,
commission, etc., when he leaves the service of his
employer....Gratuity is a lump sum payment made,
based on the total service of an employee either on
retirement or death. It is calculated as so many
months pay with reference to his service.
3. Eligibility
It is governed under the Payment of Gratuity Act 1972.
As per Sec 10 (10) of Income Tax Act, gratuity is paid when
an employee completes 5 or more years of full time service
with the employer.
OR
Gratuity is payable to an employee (nominee in case of death)
who has rendered continuous service of 5 years or more at
the time of his termination of employment, superannuation,
retirement or resignation.
Completion of continuous service of 5 years is not necessary
where the termination of employment is due to death or
disablement due to accident or disease.
4. Applicability
Every factory, mine, oil plantation, port and railway company
Every shop or establishment – if it employs 10 or more
persons 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. or
state govt.
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5. How does it
work ?
An employer may offer gratuity out of his own
funds or may approach a life insurer in order to
purchase a group gratuity plan.
In case the employer chooses a life insurer, he has
to pay annual contributions as decided by the
insurer.
The employee is also free to make contributions to
his gratuity fund. The gratuity will be paid by the
insurer based upon the terms of the group gratuity
scheme.
6. Forfeiture
Gratuity may be forfeited wholly or partially in case an
employee has been terminated for:
Any act, willful omission or negligence causing any damage
or loss to, or destruction of, property belonging to the
employer;
Or
Act of riotous or disorderly conduct or any other act of
violence on part of employee;
Or
Any act which constitutes an offence involving moral
turpitude, in the course of his employment.
7. Tax obligations for Gratuity
The gratuity received by the employee is taxable
under the head ‘Income from salary’.
In case gratuity is received by the nominee/legal
heir of the employee, the same is taxable in
their hands under the head ‘Income from other
sources’. This tax treatment varies for different
categories of individual assessees
8. Continued………..
For the purpose of calculation of exempt
gratuity, employees may be divided into 3
categories –
(a) Government employees and
(b) Nongovernment employees covered
under the Payment of Gratuity Act, 1972
(c) Nongovernment employees not covered
under the Payment of Gratuity Act, 1972
9. Continued………
In case of government employees – they are
fully exempt from receipt of gratuity.
In case of non-government employees
covered under the Payment of Gratuity Act,
1972 – Maximum exemption from tax is least
of the 3 below:
(i) Actual gratuity received;
(ii) Rs 10,00,000;
(iii) 15 days’ salary for each completed year
of service or part thereof
10. Continued………
Note:
Here, salary = basic + DA + commission (if
it’s a fixed % of sales turnover).
Completed year of service or part thereof’
means: full time service of > 6 months is
considered as 1 completed year of service; <
6 months is ignored.
Here, number of days in a month is
considered as 26. Therefore, 15 days’ salary
is arrived as = salary * 15/26
11. Continued……..
In case of non-government employees not
covered under the Payment of Gratuity
Act, 1972 – Maximum exemption from tax
is least of the 3 below:
(i) Actual gratuity received;
(ii) Rs 10,00,000;
(iii) Halfmonth’s average salary for each
completed year of service (no part
thereof)
12. Note:
Here, salary = basic + DA + commission (if it’s a
fixed % of sales turnover).
Completed year of service (no part thereof)
means: full time service of > 1 year is considered
as 1 completed year of service. < 1 year is
ignored.
Average salary =10 months’ salary (immediately
preceding the month of leaving the job)/10
13. 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.
14. Gratuity Calculation
Gratuity : 15/26* ( Present Basic
salary+DA)* (Nor. of years of service )
Here DA is applicable for govt.
employees.
26 = taken as total working days in a
month.
15. Gratuity Deduction…
It is deducted at a rate of 4.81% from the
basic salary of the employee.
Explanation : Since ..receivable Gratuity =
15/26*( Nor. of Years of Service) ( Basic
Salary)
Rate of Gratuity per month = 15/26*1/12
%= 4.81%
