The formula for gratuity calculator shows you how to calculate gratuity with accuracy. Want to know if you are eligible for gratuity or not? Let’s find out!
An employee is an individual hired by an organisation to work in a particular field based on their expertise. The organisation compensates the employee for the services they provide. Now we can check the details about eligibility Criteria for Gratuity.
In general, companies hire two types of employees:
Part-Time / Contractual Employees:
Part-time or contractual employees are engaged for a specific duration, typically based on the length of the contract offered by the company. Their remuneration is usually predetermined and remains consistent throughout their contract period.
Full-Time / Permanent Employees:
Full-time employees are permanently employed by the company until they decide to resign. Along with regular compensation based on their skills and job role, these employees also receive the benefit of gratuity.
The gratuity calculator amount is an additional perk offered to full-time employees. It is a form of financial reward or payment given to employees by the company in recognition of their long-term service and dedication.
Eligibility Criteria For Gratuity
To be eligible to receive the gratuity amount, an employee must meet the following criteria:
- The employee should be eligible for the organisational pension program or superannuation.
- The employee must have completed a minimum of 5 years of continuous service with the company.
- The 5 years of service should be without any gaps or breaks.
- The employee becomes eligible upon retirement from the company.
- In the unfortunate event of the employee’s untimely demise, disability due to an accident, or critical illness, they are also eligible to receive the gratuity amount.
Payment of Gratuity
As per Section 4 of the Act, an employee becomes eligible for gratuity payment if they have served continuously for a minimum of five years upon reaching superannuation, retirement, resignation, disablement, or in case of death. However, in situations where termination occurs due to death or disability, the requirement of five years of continuous service is not mandatory.
Retired individuals are also entitled to receive gratuity along with their pension. The Supreme Court confirmed this in the case of Allahabad Bank and others v. All India Allahabad Bank Retired Employees Association (2009), emphasising that pensionary benefits may include both pension and gratuity amounts, and the gratuity amount must be paid to the employees.
Additionally, the Act allows for gratuity calculation based on services rendered for at least 6 months. In such cases, the gratuity amount will be calculated at the rate of fifteen days’ wages based on the last drawn rate of wages by the employee, excluding any payment for overtime work.
It’s important to note that the maximum gratuity amount payable under the Act is ₹ 10 Lakhs.
Which Organisation is Eligible for Gratuity?
The Act is applicable to various types of establishments, including factories, mines, oil fields, plantations, ports, railways, motor transport undertakings, companies, and shops, provided they employ 10 or more workmen.
How to Calculate Gratuity Amount?
As an illustration, suppose Akil worked with a company for 20 years and his last drawn basic plus DA amount was ₹ 25,000. To calculate his gratuity amount, we use the formula:
Gratuity Amount for Akil= (20 * 25,000 * 15) / 26 = Rs. 2,88,461.54
However, it’s worth noting that the employer has the option to pay a higher gratuity amount to the employee. Additionally, when calculating the number of months in the last year of employment, any duration above 6 months is rounded up to the next whole number, while any duration below 6 months is rounded down to the previous lower whole number.
Important Things to Note While Calculating Gratuity
When calculating your gratuity amount, it is essential to consider the following points:
As per the Payments of Gratuity Act 1972, if an employee is terminated from their job due to any misconduct, the employer has the authority to deny the payment of gratuity to that employee.
In the unfortunate event of an employee’s demise, the gratuity amount will be given to the nominee or heir of the employee.
The current tax-free gratuity limit has been raised to ₹ 30 lakh.
Taxation Process of Gratuity
The taxation process of gratuity in India involves certain rules and regulations that determine how this retirement benefit is taxed. According to the Income Tax Act, gratuity is considered as a part of salary income and is subject to taxation.
For government employees, the entire gratuity amount received is tax-exempt. However, for non-government employees, the tax exemption is limited to the least of the following three:
Actual gratuity received
Last drawn salary × 15/26 × Number of years of service
₹ 30 lakhs (as per the current tax-free limit)
The gratuity amount received by an employee is tax-free up to the extent of the exemption limit applicable. The remaining amount, if any, is added to the individual’s total income for the financial year and taxed as per the income tax slabs.
Employees must keep in mind the taxation process while planning their finances post-retirement to make the most of this crucial retirement benefit. Consulting a tax professional or financial advisor can help individuals understand their tax liabilities and optimise their gratuity payouts effectively.
Conclusion
In conclusion, gratuity is a significant retirement benefit offered to employees as a token of appreciation for their long-term commitment and dedication to the organisation. It serves as a financial reward for their years of service. The eligibility criteria for gratuity include completing a minimum of five years of continuous service and meeting specific conditions as defined by the Act. The gratuity amount is calculated based on the years of service and the last drawn salary.
It is important for employees to be aware of the taxation process related to gratuity to avoid any surprises during their retirement. Understanding the tax exemption limits and consulting with financial experts can help individuals plan their finances effectively.
Employers must adhere to the provisions of the Payments of Gratuity Act 1972 and ensure fair and timely gratuity payouts to eligible employees. By recognising the value of gratuity, organisations can foster a positive work environment and motivate their workforce.
Overall, gratuity is a valuable benefit that contributes to employees’ financial security post-retirement and strengthens the bond between employers and employees.
FAQs
What is the maximum cap of receiving the gratuity?
The Centre recently passed an amendment that raised the maximum limit of gratuity. As per the amendment, gratuity is now tax exempt up to ₹ 20 lakh, whereas the previous ceiling was ₹ 10 lakh, as specified in Section 10(10) of the Income Tax Act.
How long does it take for an employer to pay the gratuity amount?
The employer must make arrangements to pay the gratuity amount to the eligible person within thirty days from the date it becomes payable.
I haven’t completed 5 years of service. It has been 4.5 years. Can I still get my gratuity?
No, individuals do not qualify for gratuity after completing 4.5 years of service. However, a ruling by the Madras High Court states that individuals who have completed 240 days in their fifth year of service are eligible to receive gratuity.
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