What is Gratuity in Salary?

There are certain perks if you work with an organisation for a long time. One of them is the payment of gratuity in salary.

In this article, we will highlight precisely what this benefit is and how you can use it.

According to the Payment of Gratuity Act 1972, an employer has to pay an employee a sum of money for services rendered to the company.

Typically, gratuity is paid to those employees who have completed 5 or more years in the company. Additionally, this Act covers all companies with more than 10 employees.

Informally, gratuity means a monetary "Thank You" to the employee for faithful services rendered.

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First of all, an employer solely pays gratuity in salary. There is no employee contribution at all.

Moreover, there are two ways in which an employer can pay this gratuity. The ways are: -

1. Direct payment to any employee
2. Contribution to a general gratuity plan with a service provider.

Typically, we calculate compensation on a specific portion of one's salary, which is later paid to an employee.

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Usually, 4 cases make a person eligible to receive gratuity.

These are -

• A person should be eligible for superannuation.
• A person might have resigned after working for minimum 5 years with an employer. This is the minimum eligibility for gratuity.
• Gratuity is paid when a person retires.
• It is also paid when a person passes away due to an accident or illness.

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The latest advancements concerning gratuity are -

• For tax-free compensation, the Government has raised the ceiling to ₹ 20 lakhs from ₹ 10 lakhs. Central Government employees also received the same benefit after the announcement of the 7th pay commission.
• Due to COVID-19, the Government proposes to offer a gratuity for employees working for one year in a fixed-term period.
• Moreover, an employer can refuse to pay gratuity in the case of misconduct of an employee.

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Here is the taxation policy for gratuity -

• In the case of a government employee, the gratuity is exempt from income tax.
• For other salaried individuals who receive gratuity from employers covered under the Gratuity Act, 15 days salary as per the last salary withdrawn is non-taxable.
• For those employees who are receiving gratuity from employers NOT covered by the Gratuity Act, the following 3 cases are exempt from tax -
  • ₹20,00,000
  • Gratuity amount received
  • Half month's salary for every year that the employee has completed with the employer.

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1. The gratuity earned by Government employees is exempt from tax.

2. For those under the Gratuity Act 1972, the gratuity exemption is the least of the following amounts:

• (15/26) * last drawn salary * completed years of service or part thereof more than 6 months. 
• ₹ 10 lakhs
• ₹ 20 lakhs
• Actual gratuity received

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There are some rules to bear in mind concerning the payment of gratuity.

• Forfeiture of Gratuity: As per the Gratuity Act of 1972, an employer may forfeit the payment of the entire or partial gratuity amount. This is only done in the case of disorderly conduct on the part of an employee leading to physical injury of other employees.

• Timeline for Gratuity Payment: Here's how to claim your gratuity! All you have to do is write an application to the organisation asking for your compensation. Once they view and calculate it, they will inform you and the concerned authority for disbursal. Then, disbursal will be done within 30 days.

You can withdraw your gratuity by filling and submitting a claim form 1 to your employer at the time of resignation. Some documents that they may ask of you are Aadhaar card, cancelled cheque, and bank passbook. That was how to apply for gratuity after the resignation.

So that was all from us on the calculation of gratuity in salary and the method to claim it.

Happy retirement!

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