What is the meaning of gratuity?
Gratuity refers to the amount that an employer pays his employee, in return for services offered by him to the company. However, only those employees who have been employed by the company for five years or more are given the gratuity amount. It is governed by the Payment of Gratuity Act, 1972. The employee can get the gratuity before five years if he/she gets disabled in an accident or due to a disease. Gratuity mainly depends on your last drawn salary and the years of service which are rendered to the Company.
To be eligible for gratuity payment, an employee must meet the following criteria:
- Be eligible for superannuation
- Have retired from service or resigned after continuous employment of at least five years with the company
- In the event of death, the gratuity may be paid to a nominee or to the employee if they became disabled due to sickness or an accident.
A gratuity calculator is a tool that helps employees estimate the amount of gratuity they will receive when they leave their job after at least five years of continuous service. The calculator uses a formula to calculate the gratuity amount based on the employee’s last drawn salary and the number of years they have worked for the company. To use the calculator, employees must input information about their last drawn salary, which includes their basic salary, dearness allowance, and any commissions earned from sales. The calculator will then provide an estimate of the gratuity amount in seconds. It is simple to use and can be used multiple times by adjusting the input values.
The gratuity amount for employees whose employer is covered under the Gratuity Act can be calculated using the following formula:
Gratuity = n * P * 15 / 26,
where n is the number of years of completed service with the company
P is the employee’s last drawn basic salary plus dearness allowance.
For example, if an employee has worked for a company for 10 years and their last drawn salary including dearness allowance was 60,000 rupees, their gratuity would be calculated as 15 * 60,000 * 10 / 26 = 3,46,143 rupees. It’s important to note that according to the Gratuity Act, the gratuity amount cannot exceed 20 lakh rupees. If an employee’s tenure in their last year of employment is more than six months, it will be rounded up to the nearest year. For employees whose employer is not covered under the Gratuity Act, the gratuity amount is calculated using a different formula: (15 * last drawn salary * years of service) / 30. For example, if an employee has a basic salary of 60,000 rupees and has worked continuously for 7 years for an employer not covered under the Gratuity Act, their gratuity would be calculated as (15 * 60,000 * 7) / 30 = 210,000 rupees.
Exempted gratuity in income tax act
The tax treatment of gratuity depends on the type of employee receiving it.
For government employees (at the central, state, or local level), the gratuity amount is exempt from income tax.
For private employees whose employer is covered under the Payment of Gratuity Act, the least of the following three amounts will be exempt from income tax:
1)20 lakh rupees,
2)the actual gratuity received, and
3)the eligible gratuity.
For example, if an employer paid an employee 12 lakh rupees in gratuity and the employee was eligible for a gratuity amount of 3,46,143 rupees according to the gratuity calculation formula, the lowest of these three amounts (3,46,143 rupees) would be exempt from tax. The remaining amount of 8,53,857 rupees would be subject to tax according to the employee’s income tax slab. It’s important to note that an individual’s tax-exempt gratuity amount cannot exceed 20 lakh rupees over their entire working life.
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