When a person dies, gratuities are calculated according to rules and regulations outlined by the government. The amount of gratuity payable to an employee on his death depends upon the rank, grade, length of service and other relevant factors. In this article , let's understand fully about how gratuity is calculated in case of the death of an employee.
Define Gratuity
A gratuity is a form of compensation paid to an employee or former employee for services rendered by the employee. In India, it is defined as ‘compensation payable on account of death’ under Section 135(3) of the Income Tax Act 1961 and is taxable at the source. An employee’s length of service will determine the amount of gratuity payable. It may be paid either in cash or in kind (such as free accommodation, conveyance, etc.). Let’s see how us gratuity calculated in case of death of employee in this article.
Income Tax Deduction for Gratuity
The amount of gratuity which can be deducted from gross salary is limited to ₹10,000 per month. However, if the deceased employee was drawing a pension before his/her death, the gratuity amount shall not exceed ₹2 lakhs.
How Is Gratuity Calculated in Case of Death of an Employee?
If the deceased employee was receiving any benefit such as free accommodation, conveyances etc., then the number of gratuities will be computed based on the value of those benefits. If the deceased employee was not receiving any benefit, then the gratuity amount calculation will be based on his/her monthly income.
- Example 1: A person has been employed by XYZ Company for 20 years. The salary he receives every month is ₹15000/-. During this period he received free accommodation worth ₹10000/- and conveyance worth ₹5000/-. His total gratuity would therefore be ₹50000/-. This amount should be taxed @ 30% i.e. ₹15000/-
- Example 2: A person has been employed with XYZ company for 10 years. He receives a monthly salary of ₹12500/-. During this period, he received free accommodation valued at ₹2000/- and conveyance valued at ₹1000/-. His total gratuities would therefore be ₹30000/-. This amount shall be taxed @30% ₹9000/-
A person who has worked for more than one employer during the year can claim only once the maximum limit of ₹10,000/- per month.
What Happens to Gratuity if an Employee Dies Before Five Years?
If an employee dies before completing five years of continuous service, the gratuity amount is still payable, subject to certain conditions. As per the Payment of Gratuity Act, 1972, the minimum service period required for gratuity eligibility is five years. However, there are exceptions in case of death or disablement.
In the event of the death of an employee before completing five years of service:
Nominee or Legal Heirs:
The gratuity amount would be payable to the nominee appointed by the employee. If no nominee is appointed, it will be paid to the legal heirs as per the relevant laws of succession.
Death Due to Employment:
If the death of the employee is due to an accident or illness arising out of employment, the service condition may be waived, and the nominee or legal heirs would be entitled to the gratuity.
Employer’s Discretion:
Some employers, out of goodwill or as a company policy, may choose to pay gratuity even if the service period is less than five years in the case of an employee’s death.
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Note: To determine the exact treatment in such circumstances it is essential to refer to the specific terms and conditions mentioned in the employment contract, company policy and the Payment of Gratuity Act. Additionally, legal advice must be sought to understand the implications surrounding the employee’s death and the applicable laws. |
What Are the Conditions for Claiming Gratuity?
An individual is eligible to claim gratuity if he/she meets all these three conditions:
- He/She must have served in the same capacity in the last two years immediately preceding the date of death;
- It must be within six months after the end of the financial year in which the death occurs;
- He/She must not have retired before the date of death.
FAQs
1. How Much Does it Cost?
Generally, gratuities are paid upon separation from employment or retirement. Gratuities may be paid either in cash or in kind (such as a gift certificate).
2. What If I Don't Get Any Gratuity?
If you do not receive any gratuity, then you can claim it within 3 years after your last day of work. If you fail to file the claim within this period, then you will lose all rights to the gratuity. You should also note that there is no provision for gratuity if you die during service.
3. Can I Claim Gratuity Even if I Am Not Eligible for Pension?
Yes, you can claim gratuity even if you are not eligible for a pension. However, the amount claimed cannot exceed the basic pay of the deceased. For example, if the deceased was drawing Rs. 10,000/- per month and he died on 1st July 2000, then the maximum amount which could be claimed would be Rs. 10,000 only.
4. Does Gratuity Include Medical Insurance?
Yes, gratuity includes medical insurance. In fact, gratuity is considered as part of your salary package. Therefore, you are entitled to medical benefits under the employer's health scheme.
5. Is Gratuity Tax-Free?
No, gratuity is taxable. It is subject to income tax and surcharge.
6. Who Pays the Gratuity?
The employer has to bear the burden of paying gratuity. However, the employee can claim reimbursement of gratuity expenses from the employer.
7. How Can I Calculate My Gratuity?
You can use the following formula: Gratuity Basic Pay x Number of Years Served / Total Earnings Amount of Gratuity For example, let us say that the deceased had been working with the company for 30 years and he earned ₹ 50,000/- per year. His total earnings were ₹ 150,000/-. Therefore, the amount of gratuity payable would be ₹ 25,000/-. Note: This calculation assumes that the deceased did not have any other source of income.
8. Do I Need to Submit Proof of Payment of Gratuity?
No, you do not need to submit proof. However, you must keep a record of the amount of gratuity received.
9. Are Gratuities Transferable?
No, gratuities are non-transferable.
How is gratuity calculated in a death case in India?
Gratuity in a death case in India is calculated based on the rules and regulations outlined by the government. The amount of gratuity payable depends on the rank, grade, length of service and other relevant factors. The formula for calculating gratuity under the Payment of Gratuity Act of 1972, is: Gratuity = n * b * 15 / 26 Note: n denotes the tenure of service completed in the company, and b denotes the last drawn basic salary plus dearness allowance.
What is the rule of death under gratuity?
The rule of death under gratuity states that the gratuity is payable to the nominee or the employee on disability, irrespective of whether the employee has completed five years of service or not.
Who is not eligible to get the gratuity?
Employees who are not eligible for gratuity include those who have not completed five years of service, have resigned or have been dismissed due to misconduct.
Does loss of pay affect gratuity of the employee?
Loss of pay does not affect the gratuity of the employee. The gratuity amount is calculated based on the last drawn salary and the number of years served, as mentioned in the formula above.
What are the new rules of gratuity in 2023?
In the 2023 Budget, the bar amount of gratuity was increased to ₹20,00,000 from the previous limit of ₹10,00,000.
What is the rule of gratuity for private employees?
For private employees, the gratuity rules may vary depending on the company's policies and the nature of the employment contract. However, the Gratuity Act of 1972, does not cover all private employees.
What is the mandatory period for gratuity?
The mandatory period for gratuity is five years of continuous service with the same employer.
Conclusion
It is important that you consult a Chartered Accountant or a Lawyer to ensure that you get the best possible deal when it comes to calculating gratuity. You need to make sure that you do not miss out on any deductions while filing ITR.
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