You might not know that the gratuity amount is deducted from your salary. Read on to find out how in gratuity calculation salary structure plays an important role!
Gratuity is a benefit provided by employers to employees as a token of appreciation for their long-term service to the organisation. The Gratuity Act of 1972 makes it compulsory for employers to pay a gratuity amount to their employees. One of the most important criteria is the service period of the employee. The gratuity sum is only awarded to staff members who have worked for the company for five years or longer. The Payment of Gratuity Act of 1972 governs it. For gratuity calculation, salary structure is often taken into account. If you want to know how many deductions you face from your salary because of gratuity, read the article.
What Is Gratuity?
The employer is a token of appreciation to the employee when they complete at least 5 years of service under the same company. This token of appreciation is known as gratuity. It is mandatory for employers to pay gratuity as per the gratuity act of 1972 in India.
Usually, gratuity is paid by the employers to the Employees who have retired. However, gravity can also be paid to employees who have been injured, disabled or died while serving in the company. In 1972 the Payment of Gratuity Act was passed. This is an Indian law that ensures that retired employees receive gratuity pay from their employers. The Gratuity Act also mentions the amount that should be received as gratuity, the tax exemption that is available for Gratuity and the maximum amount of Gratuity that can be received by an employee.
Who Is Eligible for Gratuity in India?
If you want to know if you are eligible for receiving gratuity pay or not we are here to help. Here is a checklist of the eligibility criteria for gratuity pay:
- If an employee wants to receive gratuity pay they must have completed at least 5 years of working with a single company.
- The employee can also pay the gratuity if the employee is retiring.
- The employee can be eligible for superannuation to receive gratuity.
- If an employee is suffering from a disability, or injury or passes away while working at the company the employer has to be a Gratuity.
The gravity act of 1972 tells the rules and regulations for the Payment of Gratuity amounts. There are employees who were covered under the gratuity act and employees who are not covered under the gratuity act. There are different rules for both of them.
However, there are some basic rules that apply to all the employers such as:
- If an employee has been working for more than 5 years in the company they are eligible for gratuity pay.
- Employers must pay a gratuity amount to their employees if they resign or retire.
- The gravity act has also set the maximum limit for gravity pay which is ₹20 lacs.
- Any payment that is made over this amount is completely voluntary and is not mandated by the government.
Gratuity Calculation in India
Gratuity calculation might be a bit complicated for some people. Allow us to show you how gratuity calculation is done. You will also get to know how the salary structure plays a very important role in gratuity calculation, especially with the influence of Pay Commission recommendations.
Gratuity calculation is usually done based on the number of years employees have worked in the company. The CTC (Cost to Company) that you are informed about when joining a company typically includes gratuity as well as Income Tax deductions. As a result, when you receive your in-hand salary, the gratuity amount is generally considered within the deductions.
Most companies deduct 4.81% of the salary and other allowances and allocate this as part of the gratuity amount. The percentage and overall structure of your salary, including gratuity, can be influenced by the Pay Commission’s recommendations, such as those reflected in the 7th Pay Matrix. These recommendations are crucial in shaping the overall pay structure for government employees, which can also set trends for salary structures in other sectors.
Understanding how gratuity is calculated in CTC becomes more insightful when considering these Pay Commission guidelines, which ensure that employee benefits like gratuity are adequately structured in line with current economic conditions.
How to Claim Gratuity in India?
If a person retires or resigns from the job the employer has to pay the gratuity within 30 days of receiving the application.
The employer has to pay the gravity within 30 days but they have to mention the date within 15 days of receiving the gravity application. If the employer wishes he or she can ask for the nominee for the gratuity claims. The gratuity payment can be made via check cash or demand draft.
- To claim the gratuity amount the employee has to give written notice to the employee to receive the gratuity before retirement or resignation.
- The payment will be made within 30 days of receiving the application.
- The employee can make one nominee or multiple nominees for the graduating amount.
- To claim the gratuity amount some important documents are supposed to be submitted such as form a copy of your Aadhaar Card, a cancelled cheque or a bank passbook. These documents are essential for receiving the gratuity amount.
- If an employee dies while walking at a company the nominees are paid the gratuity amount and if the nominees are minors then the amount is supposed to be paid to the guardians of the nominees.
Latest Updates on Gratuity
October 20, 2021: The Department of Pension and Pensioners Welfare issued an Office Memorandum, announcing that if a government employee passes away while on official duty, the family members are entitled to receive ex-gratia lump-sum compensation.
October 18, 2021: The Rajasthan government has sanctioned a gratuity payout of ₹ 476 crores for road transport employees.
July 21, 2021: In accordance with the Payment of Gratuity Act, 1972, employees are required to nominate a beneficiary within thirty days of completing one year of service with the organization.
Learn more about How is a gratuity calculated in CTC?
Gratuity Calculation Formula
Case 1: Employer Covered under the Gratuity Act
For employees whose employers fall under the Gratuity Act, the gratuity amount can be calculated using the following formula:
Gratuity = (n x b x 15) / 26
Where:
– n = Number of years served in the organization
– b = Last drawn basic salary + dearness allowance
Example:
Suppose you served a company for 15 years, and your last drawn salary including dearness allowance was ₹70,000.
Gratuity = (15 x 70,000 x 15) / 26 = ₹6,05,769
Case 2: Employees Not Covered under the Gratuity Act
For employees not covered under the Gratuity Act, the gratuity amount is calculated based on half-month salary for every year of service:
Gratuity = (15 x Last drawn salary x Working tenure) / 30
Example:
If your basic salary is ₹70,000, and you provided 10 years of consistent service, and the employer is not covered under the Gratuity Act:
Gratuity = (15 x 70,000 x 10) / 30 = ₹2,00,000
Case 3: Calculation of Gratuity in Case of Employee’s Death
In the unfortunate event of an employee’s demise, the gratuity calculation remains the same as in Case 1:
Gratuity = (n x b x 15) / 26
Where:
– n = Number of years the employee served in the organization
– b = Last drawn basic salary + dearness allowance
Example:
If the deceased served a company for 15 years, and the last drawn salary including dearness allowance was ₹70,000:
Gratuity = (15 x 70,000 x 15) / 26 = ₹6,05,769
Tax on Gratuity
The tax liability on gratuity varies based on the category of the recipient. The regulations are as follows:
Government employees, including those from local authorities, state, and central bodies, are exempt from income tax on the gratuity amount.
Qualified employees from private companies whose employers fall under the specified Act enjoy tax exemption on:
- ₹ 20 lakhs
- The eligible gratuity amount
- The actual earned gratuity
Tax Exemptions on Gratuity
As per recent amendments to the Gratuity Act, the following components are eligible for tax exemption:
- The actual earned gratuity
- The last salary (basic + DA) multiplied by years of service in the company multiplied by 15/26
- ₹ 20 lakhs (increased from ₹ 10 lakh as per the latest amendment)
To illustrate this, consider Neha, whose last drawn salary is ₹ 4.5 lakh per month, including basic salary and dearness allowance. With a service tenure of 6 years and 9 months, her gratuity fund amounts to ₹ 18,17,307. Under the new amendment, she is not liable to pay any tax.
Gratuity Rules
Key regulations related to gratuity are as follows:
- Companies with ten or more employees must provide gratuity.
- Eligibility for gratuity requires a minimum of five years of continuous service.
- Gratuity is applicable in cases of resignation, retirement, disablement due to illness or accident, demise, termination, VRS, and layoff due to retrenchment.
- Calculation of gratuity depends on the employee’s last drawn basic salary and dearness allowance.
- Terminated employees may forfeit gratuity for offenses involving moral turpitude, disorderly conduct, or violent acts.
- Even in cases of bankruptcy, employers are obligated to pay gratuity.
- Gratuity up to ₹ 20 lakhs is tax-exempt.
- Tax exemption is applicable for gratuity paid to the legal heir or widow of an employee.
- The ₹ 20 lakh threshold for tax exemption applies cumulatively.
- As per Section 4 (6) of the Act, employers can forfeit gratuity in specific cases, including willful negligence causing loss or damage to property, disorderly conduct, or offenses involving moral vileness.
Conclusion – How Much Gratuity Is Deducted From Salary in India?
In general, gratuity means a favour or a gift that is a token of appreciation. However, it is mandatory for the employees to pay the gratuity amount to their employees under the gravity act of 1972. The gratuity amount is very much similar to a bonus but it is paid as a part of your salary by the employer. It is usually paid after at least 5 years of service but the amount is based on how many years of service you provided to the company.
Employees who have resigned, retired, superannuated or died are eligible for a gratuity amount. Employees who have been laid off or faced any accident that disabled them are also eligible for a gratuity amount.
If you want to understand more about gratuity payments you can use the Vakilsearch gratuity calculator. This tool will help you calculate how much amount you will get paid based on your salary and the years of service you provide. This gratuity calculator is easy to use and saves a lot of time. The only information you have to provide is your salary and the years of work you have done with the same company.
FAQ
Is gratuity deducted from salary?
No, gratuity is not deducted from salary. It is a lump sum amount paid by the employer to the employee as a form of appreciation for their long service and contribution to the company.
Is gratuity a part of CTC?
Yes, gratuity is a part of the Cost to Company (CTC) of an employee. It is a component that makes up the gross salary of an individual.
Who is eligible for the gratuity deduction?
Employees who have completed a minimum of five years of continuous service with the same employer are eligible for gratuity.
What is the deduction of gratuity paid by the employer?
Gratuity is a tax-free one-time payment made to the employee as a form of appreciation for their long service and contribution to the company.
What are the new rules of gratuity in 2023?
There is no information available on new rules of gratuity in 2023.
How much gratuity is paid after 5 years?
The gratuity amount paid after 5 years depends on the last drawn salary and the number of years of service completed. The formula for calculating gratuity is (Last Drawn Salary × 15/26) × Number of Years of Service.
What is the limit of gratuity?
The maximum limit of gratuity payable to an employee is Rs. 20 lakh.
What are the rules of gratuity?
The Payment of Gratuity Act, 1972 governs the rules of gratuity in India. According to the act, employees who have completed a minimum of five years of continuous service with the same employer are eligible for gratuity.
What is the time period for gratuity?
The employer is required to pay the gratuity amount within 30 days from the date it becomes payable.
How do I claim gratuity?
To claim gratuity, the employee must apply and send the application for gratuity to the employer. Once the application is received, it is acknowledged, and the amount of gratuity is calculated for further procedures.
The employer must then pay the gratuity within a time frame of 30 days.
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