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Gratuity is the monetary benefit given by an employer to its employee at the time of his retirement. It is a form of financial “thank you” provided by the employer to the employee on the completion of 5 years of service. Mostly an average individual works for around 30-35 years in his lifetime. Such an extended period of services given by an individual to the Company demands some recognition or bonus at the time of retirement. Gratuity is one such appreciation thanking individuals for their diligent services towards the growth and development of the organization. This benefit of Gratuity calculation is payable under the Payment of Gratuity Act, 1972.
Gratuity is paid to an individual on fulfilling the following criteria’ :
An organisation having ten or more employees on any day in the preceding 12 months is entitled to pay gratuity to eligible candidates. Once the Act becomes applicable to an employer after that gratuity is applicable even if the number of employees goes below 10. Several components go into the making of the gratuity amount. The gratuity amount depends on the time one has served in the company and the amount of salary last drawn.
Let us understand through an example:
Let’s assume S= number of years served in the company
A=Basic last salary drawn + DA
Therefore, Gratuity= S*A*15/26
An employee who has worked with an organization for 20 years and has INR 25,000 as his last drawn salary+ DA amount
Then Gratuity= 20*25,000*15/26
Points to be considered
Since gratuity is a sort of tip, the employer could pay a higher amount as per his wish. However, the amount should not exceed INR 10 lakhs.
The Taxation process of gratuity depends upon the receiver of the gratuity amount. The process of calculation of gratuity amount exempted has different cases as follows:
Exemptions on Gratuity received by government employees: For employees working under the state or central government or local authority, gratuity amount is exempted from income tax.
Exemptions on Gratuity received by private-sector employees covered under the Act: If the employer is covered under the Gratuity Act, in such cases 15 days salary as per employees last drawn salary is exempted from tax
Exemption on Gratuity received by private employees not covered under the Act: Employees those who do not fall under the limits of Payment of Gratuity Act are eligible to certain exemptions as follows:
Any amount exceeding the above-mentioned limit is not exempted from tax.
Initiation: The employee should send an application to the employer for his gratuity owned by a company.
Calculation: Once the employer receives the application, the next step is for the Company to calculate the amount of gratuity. Further, after the calculation of the amount, the company has to provide notice to the employee and controlling authority with the specified amount.
Disbursal: This is the final step of the payment process, in which the employer has a period of 30 days for paying the gratuity amount.
Forfeiture: The employer has the authority to forfeit the payment of gratuity, as per the Payment of Gratuity Act of 1972. This can happen in a case where the employee got terminated because of his disorderly conduct at the time of service. If an employee gets charged with physical abuse, he loses the opportunity of receiving the gratuity amount.
If an employee dies, the gratuity amount should be paid to the nominee mentioned by the employee.
*Important Note: According to the amendment made by the Central Board of Direct Taxes (CBDT), the maximum limit of gratuity has been increased. Now, the tax exemption amount has been increased from 10 lakhs to 20 lakh rupees. This amendment comes under section 10(10) of the Income Tax Act.
Also, Read: Avail the Gratuity Money it’s your Legal Right!