Article

Gratuity- All You Want to Know
June 26 , 2013

Think of gratuity as a reward for loyalty, in the age where job-hopping is in style. It is one of the benefits that employers reserve for those who stay long enough with them. But this favour is not left to the employer's impulses; gratuity is governed by the central government's Payment of Gratuity Act, 1972. In this article you will learn about what is gratuity, calculation of gratuity dues and taxability of gratuity.

What is gratuity? 

Gratuity is one of the salary benefits that form part of your CTC. It is a welfare benefit. Your company must pay you the minimum gratuity amount as legally required but nothing stops it from paying more, if it wishes.

Gratuity is paid when a person leaves the job on retirement, superannuation, resignation, due to disablement or death. Companies can contribute to a gratuity funds managed by a life insurance company or they can maintain their own gratuity fund.

Calculation of gratuity

According to the Act, gratuity is to be calculated on fifteen days for every completed year of service at the rate of last salary drawn. Working days in a month is taken as 26 so monthly salary is to be divided by 26 to arrive at daily rate. Salary for gratuity due calculation is Basic (+DA+fixed commission, if applicable).

Gratuity = 15*salary/26*number of service years

For calculating completed service years, months above 6 are rounded to the next year and months less than 6 are not considered. So while quitting job you can plan your exit so that it is after 6 months of the completed service year, to get gratuity for that year too Maximum gratuity amount is Rs 10 lakhs but as mentioned above, you can still receive higher gratuity.

Who is eligible for gratuity?

Anybody working at a firm, factory or shop employing more than 10 people and who has completed minimum 5 years of service at that establishment is entitled to get gratuity payment.

Income tax exemption of gratuity amount

Gratuity is treated as part of 'Income from salary' for Income Tax purpose. Government employees have exemption on the entire gratuity amount.

Maximum tax exemption for employees of non-government establishments is Rs 10 lakhs, provided gratuity due is calculated as per provisions of the Act, as described above. If your gratuity due is lower, then that amount gets tax exemption.

Conclusion

Gratuity is payable when you leave service after completion of at least 5 years. Remember that gratuity can be forfeited entirely if you have been kicked out of the company for some moral offence. Or if you cause loss or damage to company property the company is allowed to hold back the gratuity by that amount.

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