Under the Payment of Gratuity Act, 1972, employers pay gratuity amounts to their employees as a token of appreciation for their contributions to the company. It is a monetary benefit provided to employees engaged in mines, factories, plantations, oilfields, ports etc., after their retirement.
However, you need to adhere to specific rules under this Gratuity Act related to its payment. Keep scrolling if you want to learn more about it!
Under the Gratuity Act, only an employer pays a gratuity amount to an employee. Employers may either choose to pay the sum from their account. Else, they can opt for a general insurance provider.
A company deposits the annual contribution with an insurance provider. In return, it pays the payable gratuity amount to an employee based on policy guidelines.
The calculation formula is different for two broad categories:
1. Employer Covered Under Gratuity Act
2. Employer Not Covered Under Gratuity Act
In the first case, employers use the following formula:
Total gratuity amount = n*b*15 / 26
Where n = number of years in providing services to a company.
b= last basic salary and dearness allowance.
Take a look at the following example:
|
Total tenure of your service in a company |
15 |
|
Last basic salary + dearness allowance |
₹30,000 |
|
Total gratuity amount |
15x ₹30,000x15/26 = ₹2,59,615 |
If employers are not covered under this act, they calculate the payable amount based on each year's half-month salary. Accordingly, use the following formula:
Total gratuity amount = (15 * Your last drawn salary * the working tenure) / 30.
Here’s another example:
|
Total tenure of your service in a company |
7 |
|
Last basic salary + dearness allowance |
₹30,000 |
|
Total gratuity amount |
15x ₹30,000x7/30 = ₹1,05,000 |
Also, as an employer, you must note the following pointers:
Round off anything above 6 months to the next number. Similarly, round off anything below 6 to the previous number. For example, if the tenure of service is 7 years 8 months, consider it 8 months of service tenure during calculation. If your service tenure is 7 years 4 months, consider it 7 years as your service tenure.
Take a look at the other gratuity rules in India mentioned below:
1. Gratuity Act mandates that employees qualify to receive gratuity payment after completing 5 years of service in a company
2. Employers must pay a gratuity amount to their employees on their superannuation and resignation or retirement.
3. The maximum gratuity payment that an employee can receive is ₹20,00,000. Thus, payments above ₹20,00,000 is a voluntary payment and not forced by law.
In case of an employee's death or disability due to accidents or disease, an employer must pay his/her nominee or legal heir. It is applicable irrespective of his/her years of service in an organisation.
If a Nominee is a Minor
If the nominee is a minor, an Assistant Labour Commissioner will invest gratuity sum in a term deposit in his/her name. It is for the financial benefit of the minor till he/she becomes a major. The official deposits this amount with a nationalised bank, such as the State Bank of India.
Here are the following gratuity payment rules in India that you need to follow:
Employee, legal or a nominee can file a complaint to the Assistant Labour Commissioner in case of the following circumstances:
Section 4 of the Gratuity Act permits an employer to forfeit an employee from the gratuity payment for the following circumstances:
Go through the following taxation rules for gratuity:
1. Government Employees – Employees working in government (central/state or local) enjoy tax exemption on gratuity.
2. Private Employees – Employees working under an employer who is covered under the Gratuity Act, the tax exemption is applicable for the least of the following:
1. ₹20,00,000
2. The Actual Gratuity Amount
3. Eligible Gratuity
Let's take a simple example for clearer understanding:
|
Total Gratuity Amount |
₹12,00,000 |
|
Eligible Gratuity Amount (as per the example mentioned above) |
₹2,59,615 |
|
Maximum Tax Exemption Limit |
₹20,00,000 |
|
Exemption Amount |
₹2,59,615 (least of the three) |
|
Remaining Taxable Amount (based on your income tax slab) |
₹9,40,385 |
As an employee or a nominee, file a complaint if you face any circumstances mentioned above. However, do not forget to follow these points mentioned below:
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Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.
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