Every salaried employee must have heard about gratuity, but not many of them might be aware of what is gratuity and how it is calculated. Gratuity, in fact, is a retirement benefit which is usually payable at the time of cessation of one’s employment and on the basis of duration of service. It is a ‘gratuitous’ payment from an employer to an employee for the services rendered to the company, which is paid either at the time of retirement or when one leaves the organisation. Gratuity is payable in case of continuous service of 5 years or more, and as per the current laws, gratuity received up to Rs 20 lakh is exempt from tax.
1. Who is eligible for receiving gratuity?
As per the Section 3 of the Payment of Gratuity Act, 1972 (Gratuity Act), factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments with 10 or more employees are required to pay gratuity to their employees as per the provisions under the Gratuity Act. It is pertinent to note that once the employee strength reaches to 10 or more, employees are eligible to receive gratuity even if the strength subsequently goes below 10 at a later stage.
“Contract workers and temporary staff of an organisation are also eligible for the gratuity amount as long as they are considered its employees. However, apprentices are not eligible for gratuity. Employees on an overseas assignment or deputation are also eligible for gratuity as long as they are on the rolls of the company. The probation period is also taken into consideration while determining the number of years of one’s service,” says Akhil Chandna, Director, Grant Thornton India LLP.
2. When an employer is liable to pay gratuity?
Gratuity is payable to an employee on the termination of employment after the employee has rendered a continuous service for not less than 5 years
# on superannuation, or
# on retirement or resignation, or
# on death or disablement owing to any disease or accident
It is, however, important to note that the completion of continuous service of 5 years will not be necessary where the termination of the employment of any employee is due to death or disablement. In the case of death of the employee, gratuity payable to him will be paid to his nominee or, if no nomination has been made, to his heirs.
3. In how many days the gratuity amount is remitted by the employer?
The employers have to pay the gratuity within 30 days from the date it becomes due. If it is not paid within the prescribed time limit, the employer is required to pay the gratuity amount with interest as specified by the government from time to time.
4. Can gratuity exemption be claimed more than once?
As per the Income Tax Act, 1961, the exemption for gratuity can be claimed unlimited number of times until it does not exceed the maximum exemption limit i.e. Rs 20 lakh. It means that the ceiling of exemption is applied to the aggregate of the gratuities in case the same is received more than once in the same year, or in different years.
“It is, however, important to note that where an employee had received gratuity in any earlier year(s) from one or more employers and had claimed an exemption under section 10(10) in respect of gratuity received in earlier, he will still be entitled to this exemption. However, in such a case, the limit of Rs 20,00,000 shall be reduced by the amount of exemption(s) availed in the earlier year(s) and the balance of the same can be claimed as an exemption,” informs Chandna.
5. How is gratuity calculated?
Amount received as gratuity: Rs 300,000
Year of service = 8 yr 8 months
Last drawn salary = Rs 50,000 (for last 5 months; before that the basic was Rs 40,000)
Dearness allowance (DA) = Rs 2000
Tax treatment for Gratuity:
i. For Government employees- Exempted
ii. For employees covered under Gratuity Act, 1972
Least of the following-
Amount exempt from tax under section 10(10) = 2,70,000/-
iii. For other employees (ie not covered under Gratuity Act, 1972)
Least of the following-
Amount exempt from tax under section 10(10) = 1,88,000/-
(Please note that there is a distinction between employees covered under the Payment of Gratuity Act and those who are not covered under the Gratuity Act).