You receive gratuity but don't know how much of it is exempt from tax. Read this article to know all about Gratuity Deduction!
Tax Deducted on Gratuity: In India, a gratuity is a lump sum payment that an employer is legally required to pay to an employee who has completed at least five years of continuous service with the company. The amount Deducted from gratuity an employee is entitled to receive is based on their salary and the number of years they have worked for the company.
Employees can choose to receive their gratuity as a lump sum payment or as a monthly pension. Gratuity deduction is a process whereby an employer deducts a certain percentage of an employee’s salary each month and contributes it to a gratuity fund. This fund is then used to pay the employee’s gratuity when they leave the company.
The gravity act of 1972 gives the employer the right to completely forfeit the gratuity if the employee is fired on the basis of misconduct. And even in normal cases, a person receives gravity only when they have completed at least five years of service under the same employer. In this blog we’ll know How Much Tax Will Be Deducted on Gratuity.
Tax Deduction on Gratuity
When an employee gets a gratuity they have to pay tax for it when it exceeds a certain amount. This is called Tax deduction on Gratuity.
There has been a change that has been made recently in the private sector. The ceiling was ₹10 lacs and now it is ₹ 20 lakhs for tax exemption for gratuity.
- If an employee works under a Centre, state or local government the gratuity amount paid to them is tax-free.
- And if the employee works under a company which is covered by the gratuity act then up to 15 days’ salary of that individual is exempt from tax.
- In cases where the employees working in a company that is not covered under the gratuity act the amount that is free from tax is either the ceiling amount of ₹20 lakhs or the half-month salary for the period of time, they have completed the service with the employer.
How to Calculate the Gratuity?
There is a certain process for calculating the gratuity that an employee will receive. This calculation depends on the period of time for which the employee has worked with the organization or company and the salary here she was receiving.
If you want to calculate the gratuity you will receive you have to multiply 15 by the period of service and the salary amount you have received and then divide the amount you get by 30.
Gratuity= (15× Salary Received× period of service) /30
In this formula, the salary that is considered is the latest salary amount that has been withdrawn. The period of service that is taken into account is in years. If a person has worked for less than 6 months then that year is not calculated and if they have worked for more than 6 months then the year is calculated.
For example, if a person has worked for 7 years and 9 months the period of service will be calculated as 8 years but if a person has worked for 7 years and 3 months then the period of service will be taken as 7 years.
If an employee dies an unfortunate and unexpected death while serving in the company the calculation is a bit different. In this case, the calculation is done based on the period of time for which the employee has served. The maximum gratuity that can be paid in this case is ₹ 20 lakh.
- If the employee has worked for less than a year then the gratuity that is paid is two times the base salary.
- If the employee has worked for more than 5 years but less than 11 years the gratuity is 12 times the base salary
- The gratuity is 20 times the basic salary if the employees have worked for more than 11 years but less than 20 years.
- And if the employee has worked for more than 20 years in the same company, half of the base salary for each completed 6-month period is given as Gratuity.
Eligibility for Gratuity
All the gratuity is supposed to be paid by the employer to the employee under the Gratuity Act of 1972 there are some conditions for it. We have mentioned below some situations when a person is eligible to receive gratuity.
- A person is eligible to receive gratuity if they retire.
- If a person is eligible for superannuation he or she is eligible for gratuity. Superannuation means when an employee has reached the age of retirement.
- If an employee resigns and has worked for at least 5 years for a single employer they are eligible to receive gratuity.
- If an employee who has been working passes away or is disabled due to some situation he/she is eligible for Gravity.
These were some of the conditions when a person is eligible for Gratuity. If you want to calculate the gratuity deduction, you can use the gratuity calculator by Vakilsearch and calculate the gravity deduction. This tool will also allow you to calculate the tax deduction on the gratuity you receive very easily and save time as well.
Conclusion – How Much Tax Will Be Deducted on Gratuity
Gratuity is a lump sum payment that an employer is required to pay to an employee upon retirement, resignation, or death. Gratuity is calculated as a percentage of the employee’s salary and is based on the length of service with the employer. The gratuity deduction is a deduction from an employee’s salary that is used to fund their gratuity payment. The gratuity deduction is capped at 6% of the employee’s salary.
VakilSearch is an online platform that provides best in class legal assistance and services. If you wish to calculate your tax deducted on gratuity you can use their gratuity deduction calculator.
You have to provide the basic details such as the time period for which you have served under a company and the salary you received and it will calculate the gratuity amount that you will receive when you retire or under any other situations.
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