This is the formula used for gratuity payment by the employers - Gratuity = (Last Drawn Basic Salary + Dearness Allowance) * 15/26 * the number of years of service.
According to Indian labor law, gratuities serve as a form of security and recognition for employees’ commitment to their organizations. This comprehensive guide clarifies the rules of gratuity payment in India, shedding light on their nuances, eligibility criteria, calculations, and the crucial role they play in employees’ financial wellbeing post-employment. Employees are empowered to understand their entitled benefits when employers understand these regulations, which fosters a more informed and equitable workplace.
Rules for Gratuity Payment in India
- Gratuity Eligibility Criteria: A Minimum of 10 Employees Required
Gratuity becomes payable when an organization employs a minimum of 10 individuals, emphasizing the importance of workforce size in determining eligibility for this employee benefit.
- Service Tenure Requirement: 5 Years for Gratuity Eligibility
Employees must complete a minimum of 5 years of service to be eligible for gratuity, underscoring the significance of prolonged commitment and dedication to the organization.
- Gratuity Beyond Retirement: Not Restricted to Retirement Alone
Contrary to common belief, gratuity is not limited to retirement scenarios. This employee benefit can be rightfully claimed in various situations beyond retirement, reflecting its versatile applicability.
- Gratuity Calculation Formula: Last Drawn Salary and Years of Service
The calculation of gratuity is intricately tied to the employee’s last drawn salary and the number of years of dedicated service, ensuring a fair and consistent approach to compensation.
- Forfeiture of Gratuity: Reasons for Possible Loss
Gratuity can be forfeited for various reasons, including offenses involving moral turpitude, disorderly conduct, or violent acts. Employers can withhold gratuity in specific cases defined by the law.
- Gratuity During Bankruptcy: Employers Obligated to Pay
Even in the event of bankruptcy, employers are legally obligated to pay gratuity to their employees, emphasizing the financial security of the workforce during challenging times.
- Tax Exemption Limit: Gratuity Up to Rs.20 Lakh Exempted
Gratuity up to the substantial amount of Rs.20 lakh enjoys tax exemption, providing a significant financial benefit to employees and recognizing the value of this long-term service incentive.
- Cumulative Gratuity Tax Exemption: Rs.20 Lakh Threshold Applies Cumulatively
The Rs.20 lakh threshold for tax exemption applies cumulatively, considering the total gratuity received over time. This ensures fair tax treatment for employees receiving gratuity in installments.
- Tax Exemption for Legal Heirs: Gratuity Paid to Widow or Legal Heir
Gratuity paid to the widow or legal heir of an employee is exempt from tax, acknowledging the sensitive nature of such situations and providing financial relief to the affected family members.
New Rules of Gratuity Payment in India
On July 1, 2022, the new labor law went into effect for all businesses and organizations. Working hours, the Provident Fund, and the in-hand salary have all decreased as a result of the new labor law. Take-home pay will bear the brunt of this legislation.
Companies must ensure that 50% of their employees’ CTC (cost to company) is basic pay, while the remaining 50% is made up of employee allowances, house rent, and overtime, according to the rules of gratuity payment in India for 2022. Additionally, any additional allowances or exemptions paid by the business that exceed 50% of the CTC will be considered compensation.
The law restricting the maximum basic pay to 50% of CTC under the new rules of gratuity payment in India for 2022 will increase the gratuity bonus that will be paid to employees. The gratuity amount will be calculated based on a large salary base that includes basic pay and allowances.
Overtime, defined as working for more than 15 minutes, is nomiated for compensation.
The work capacity is limited to 48 hours, as stated by the government.
How Is the Termination of Service and Gratuity Disbursement Interlinked?
Termination of service is a natural phenomenon in our lives. As soon as we complete the total tenure of service, we all have to retire. But what is so special about service termination that can happen at any particular phase of life? Most of the service personnel acknowledge that retirement or termination of service enables them to get access to a total amount of financial incentives.
As a matter of fact, veterans from the public sector organisations also enjoy pensions. However, it is essential to note that the amount of financial incentive received by an employee depends on the nature and tenure of the service he was involved in. Therefore, the amount of financial gain varies from one organisation to another depending on the nature of employment.
How is Gratuity Linked to Retirement?
Gratuity is a lump sum paid by the employer to their employee as a mark of appreciation of his/her/their work based on the tenure of service. According to the Payment of Gratuity Act of 1972, an employer is responsible for paying this amount to any employee who has rendered continuous service to his/her organisation for a minimum of 5 years or more.
Who Pays the Gratuity Amount?
According to the Gratuity Payment in India Act of 1972, any organization with more than 10 staff is responsible to pay gratuity who has worked at the organization for more than 5 years without any service break in between. The employer can directly pay the Gratuity amount or hire any service provider who offers a general gratuity insurance plan.
The Gratuity Payment in India Act of 1972 is applicable for the staff working in all of India’s states and Union Territories. The rule for gratuity disbursement applies to staff of the government and non-government organizations. It is essential to mention that a minimum tenure of 5 years in continuity can make the employee for the said benefit.
On the other hand, organizations that employ 10 or more working in factories/railway companies/oilfields, plantations/ports/mines/shops, or any other establishments are subjected to pay gratuity.
When Can You Claim Gratuity?
An employee can claim this amount from their organisation at the time of retirement, precisely. On the other hand, the nominee can claim the gratuity amount on superannuation of service or account of the employee’s untimely demise. If any employee suffers from disabilities resulting from any disease or accident, they can also claim gratuity.
In case of death or disabilities of the claimant, the continuation of service for a minimum period of 5 years will not be valid. The nominee or the employee cannot claim this lump sum amount if the termination of the service is on account of death or accident.
In case of the death of the claimant, if the nominee is a minor, a designated controlling authority will deposit the amount to a bank or any other financial institution, that matter of fact. The legal heir or the nominee can claim the amount related to gratuity later.
Is Gratuity Taxable?
Gratuity Payment in India is calculated based on the last drawn salary, including the Dearness Allowance and the number of years of service rendered to the employer. If the amount is less than ₹ 2,00,000 (2 lakhs), it will be exempted from income tax calculation. However, for any amount exceeding ₹ 2,00,000 (2 lakhs), the employee will be liable to pay tax on the extra amount earned.
If an employee has worked in multiple organizations for 5 years or more, he will receive numerous Gratuity payments. To compute the taxable amount, the cumulative amount of the benefit will be considered. In this case, the employee will be liable to pay tax if the cumulative Gratuity they have received is higher than ₹2,000,000 ( 2 lacs). After the deduction of ₹2,000,000, the rest of the cumulative Gratuity will be taxable as per tax regulation procedures applicable in India.
Conclusion – Rules of Gratuity Payment in India
Gratuity amount calculation can be done based on specific aspects declared by India’s Government (GoI). The first and foremost aspect remains the last drawn basic salary of the concerned employee. On the whole, gratuity amount disbursement remains the employers’ choice depending on the service terms and conditions. Hope this blog regarding Rules of Gratuity Payment in India was helpful.
