What is Gratuity in Salary?
Gratuity in salary is a sum of money or an incentive that is given to an employee upon leaving his employer. The amount of gratuity offered to an employee depends on the company and can vary from company to company. While for most salary related estimations you can just calculators such as epf interest calculator, when it comes to gratuity it would be beneficial if you took the time to understand how it works.
How Gratuity works?
The amount of gratuity offered to an employee differs from one company to another, depending on the industry in which they work and also the experience level of the employee. Gratuity in salary may be paid at varying rates depending on the industry and experience level of the employee. This amount can be as low as 20% of your annual pay or more than 50% of your annual pay if you are new to the industry or if you have worked for less than 5 years with your current employer.
Gratuity in salary can be paid either as part of regular salary or as a separate sum. For example, if you are paid monthly, you will get one month’s salary as gratuity when you leave your job; but if you are paid annually, then this sum can be added to your annual bonus figure so that it becomes part of your annual bonus.
Eligibility criteria for gratuity
The first eligibility criterion is that you are eligible for superannuation. This means you have to be an employee of the organisation or a contractor and have been employed there for at least 5 years before the date of receipt of the gratuity.
The second eligibility criterion is that you retire from work. This means that you must be aged 58 or over and have reached your normal retirement age (NRA)
The third eligibility criterion is that you suffer disability or pass away. In this case, it means that while still employed, your health has deteriorated so much that it prevents you from working at full capacity anymore.
The fourth eligibility criterion is that you resign after 5 years of service with their current employer. This means that once you leave their company, they cannot deny any future benefits to which they may be entitled due to their former employment with them.
How is gratuity calculated?
Employers use the following formula for calculating the gratuity amount:
Gratuity = A * B *15/26
Where A stands for the number of years an employee has worked in a particular organisation
And B stands for the last salary that was drawn by the employee including the dearness allowance
In accordance with the gratuity act the employer can offer a gratuity amount greater Rs. 10 lakhs. The amount that exceeds Rs. 10 lakhs is viewed as a voluntary contribution and is not imposed by law. The amount exceeding Rs. 10 lakhs is called as ex-gratia. If the calculations are still confusing, you can just use a gratuity calculator online to make it easy on yourself. Click here to learn more.
Taxation rules applicable on gratuity
The taxation laws applicable on gratuity depend on the employee who is the recipient of the gratuity:
- For a government employee: the gratuity amount is exempt from being taxed by the income tax
- For a private employee organization: gets a tax exemption on a portion of the salary if they are covered by the gratuity act: