All about Gratuity?

What is Gratuity?

Gratuity is defined as a sum of money that is paid to the employee over and above the decided salary at the time of his retirement

Who is eligible for Gratuity?

An employee is eligible to receive a gratuity only if he has completed five years of employment with an organization.

However, he can receive a gratuity before the completion of five years in case of his death or he has become disabled due to disease or accident.

When Gratuity is payable?

—Gratuity is payable for eligible individuals in the following scenarios:

    1) During Retirement
2) Resignation or Termination
3) On death
4) On disability due to accident or disease
5) On Retrenchment lay off
6) On Voluntary Retirement Scheme (VRS)

How to calculate Gratuity for employees covered under Gratuity Act?

The formula is as under- 
(15 * last drawn salary * tenure of working)/ 26

Here the tenure includes each completed year of service or part of thereof in excess of 6 months. 

For calculating gratuity, salary includes basic pay, dearness allowance, and commission based on sales.

What is the gratuity amount payable to nominee in case of death of employee?

In case of death or permanent disability of an employee, an employer is mandated by law to pay gratuity to him or his legal heir as the case may be, irrespective of the number of years of continuous service. The gratuity is paid on the basis of the length of the service rendered to the institution where the maximum benefit is restricted to Rs. 20 lakh.

Length of service and Rate

—Less than one year – 2 times of basic pay

—One year or more but less than 5 years – 6 times of basic pay

—5 years or more but less than 11 years – 12 times of basic pay

—11 years or more but less than 20 years – 20 times of basic pay

—20 years or more – Half of salary for every completed 6 monthly period subject to maximum of 33 times of salary.

What are gratuity payment rules?

The payment rules of gratuity says that once the employee becomes eligible to receive gratuity, he can apply within 30 days from the date it becomes payable. 

The payment needs to be made within 30 days from the date of receipt of application.

In case the employer rejects the application for the payment of gratuity, he needs to specify the reason for the same.

An employee or legal nominee can complain to the controlling authority (Assistant Labor Commissioner) in case of any dispute due to the refusal of the application, or underpayment of the gratuity amount or failure to make the payment within the stipulated period.

The gratuity is still payable even if the employer goes bankrupt and no court order can put a stay on it

What are the conditions in which gratuity is forfeited?

If the service of the employee is terminated due to any act, willful omission, or negligence causing damage or loss to the property of the employer, the employee’s gratuity shall be forfeited to the extent of loss or damage. 

What is the tax implication of the gratuity amount received?

The rules of taxation of gratuity amount are different for government and non-government employees.

1) As per current law, gratuity received by the government employees is totally tax-exempt. The maximum amount they can receive through gratuity is Rs. 20 lakh as per the amendments made after following the 7th Pay Commission recommendations.

2) For the non-government employees, the minimum of the following is exempt from tax-

    a) 20 lakh or
b) Actual gratuity received or
c) Amount of gratuity an employee is eligible to receive

3) Any gratuity received by the employee’s widow or legal heirs is completely tax-free in their hands.

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