In addition to the income, firms offer other benefits to their employees, such as health and wellness programmes. Gratuity is one such benefit that companies must provide. Let's take a closer look at gratuities.
Introduction
Retire or Quit a Company you are entitled to a gratuity. Compensation can only be received after five years of continuous work. When employees leave or retire, the business doesn’t have to pay them a bonus. As a result of a new law implemented in 1972, employers with ten or more employees were required to pay gratuity. Depending on the amount of money you have received, a portion of this gratuity may be subject to taxation. Gratuity Exemption For Employees complies on various regulations in India.
Gratuities received by government employees are currently exempt from taxation on their whole. According to the adjustment made after the advice of the 7th Pay Commission, the most money they are allowed to receive is 20 lakhs. This blog discusses the fundamentals of gratuity and identifies which employees are covered and which are not.
What is Gratuity?
It is a form of compensation given to employees to show gratitude for their loyalty and dedication to the company. Gratuity payments are authorised by the Payment of Gratuity Act of 1972 and must be made to workers who have completed at least five years of service. In most cases, gratuity payments are paid when an employee retires or quits the workforce. However, it is possible to pay compensation in some circumstances.
A gratuity is a form of extra compensation paid to employees by their employers. The maximum amount of bonus that can be deducted from taxable income is now Rs. 20 lakhs, according to a recent adjustment made under Section 10(10) of the Income Tax Act, 1961. After March 29, 2018, employees who leave their jobs due to death, retirement, resignation, or disability are no longer free from paying taxes up to the previous exemption amount of Rs 20 lakhs.
Gratuity Eligibility Requirements
The company must pay the total sum if an employee meets specific requirements. The following are the requirements:
- Employee– A person is considered an employee of an organisation if they get paid. Those who are apprentices are not entitled to this advantage.
- Term– The employee must have five years of uninterrupted service under this category.
- Resignation/Superannuation– It is only paid upon an employee’s resignation, retirement, or death, following the completion of the required term.
In addition, any company that employs more than ten people at any given moment is required to offer this benefit.
Gratuity Policies and Guidelines
Keep in mind the unique rules and regulations that apply to gratuity payments. The following is a list of all of the rules and regulations:
- When an employee is terminated, the employer can refuse to pay gratuity, even though the person is entitled to it.
- Employees must pay taxes on any excess gratuity received from their employers if the employer has spent more than the employees are entitled to receive in a year.
- When an employee passes away, their nominee or legal heir receives the gratuity and would be responsible for paying the appropriate taxes on the gratuity amount.
Gratuity Exemption For Employees
The Gratuity exemption for employees in India must comply with the following regulations:
1. Employees Covered by the Gratuity Payment Act
Individuals working in any listed enterprises or educational institution with ten or more workers on any given day in the prior year are eligible for gratuity payments. Even if an employer has less than ten employees, gratuity is still required under the Act.
Calculation Of Taxable-Free Gratuity
The following are all exempt from tax:
- Number of years employed* 15/26* Previous wage (basic + DA)
- It has been increased from Rs. 10 Lakhs (the amendment) to Rs. 20 Lakhs
- Amount of gratuity that was paid
For example,
- The pay (Basic + DA)
- Previously, that was last drawn is 1 lakh
The employee has 20 years of experience (will be rounded off)
Gratuity: 1,000,000*20*15/26 = 11,53,846
- As amended, the last drawn pay is Rs. 1 lakh (basic plus DA).
The total number of years worked is 20. (will be rounded off)
Gratuity 1,000,000*20*15/26 = 11,53,846
- Maximum Gratuity Exemption For Employees
- Previously 10 lakhs
- As amended, 20 lakhs.
- Gratuity received
- Previously 11lakh
- As Amended, 11 lakh.
- The amount of the Gratuity Exemption For Employees (least of the above)
- Previously 1 lakh
- As amended, 11 lakh
- Taxable gratuity,
- Previously 1 lakh,
- As Amended nil
Let’s look at an example to grasp the concept better: Mr X’s last pay (basic + DA) was Rs. 1 Lakh. An 11 Lakh gratuity is due to him as a result of his service. Since he was 19 and seven months old, he has been actively employed.
Observations:
- Every year, or part of a year, of service is worth 15 days of salary, calculated as 15/26 of the last year’s income.
- Service years are rounded up.
2. Employees Not Covered by Gratuity Payment Act
Even if the organisation does not fall under the purview of the Payment of Gratuity Act, there is no legal need for an employer to refrain from providing gratuities to its employees.
Calculation of the tax-exempt amount for Gratuities
The followings are Gratuity Exemption For Employees:
- The last ten months’ average wage (basic + DA) divided by the number of years worked
- The sum of Rs. ten lakhs
- Actual payment of gratuity
The following formula would be used to determine whether or not these personnel are exempt from receiving gratuities:
For example, Mr A job spans 25 years and two months. The last ten months’ average wage was Rs90,000. His gratuity is 11 Lakhs.
1. The average income for the past ten weeks was Rs.90,000
- 25 is the number of years that the employee has been employed (will be rounded off)
- Gratuity 90,000*25*1/2 = 11,25,000
2. The maximum number of people who can be exempted is ten lakhs.
3. The amount that was received for the gratuity was 11 Lakhs.
- Therefore, the minimum exemption is 10 Lakhs
- A gratuity of 1 Lakh Taxable
Observations:
- An average of the last ten months’ wages is considered.
- Years of service are rounded up
3. Employees of the Government
Employees of the federal, state, or local governments are not subject to income tax on death-or-retirement benefits they receive from their employers in these capacities. As a result, all university professors and instructors who work for institutions founded by the state legislature or an act of Parliament are considered government workers.
Conclusion – Gratuity Exemption For Employees
After learning about gratuity, verifying with your employer is a good idea to see if the Gratuity Act covers the organisation. It is common for compensation to be paid at the same time as or shortly after the final payment. Employers are required by law to pay the remaining sum in 30 days. If the payment is late, the employer must pay simple interest from the due date to the payment date. Improved calculations for online payments can save you a lot of time, and working with VakilSearch makes this feasible.
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