What Is Gratuity And Who Is Eligible To Get It?

We all know that one cannot overlook the importance of money to lead a better life. For an employee working in an organization, salary is that facade of money that influences his current life along with his retirement plan in the future. Gratuity is one of the integral aspects of compensation most business ventures need to keep in mind.

The word "Gratuity" itself suggests gratitude and has the very essence of it as well. Gratuity is a portion of the salary an employee gets from his employer for the services he/she renders in an organisation. It is a form of recognition by an organization towards loyal and hardworking employees. This payment is meant to assist employees during their retirement days fundamentally. Individuals look forward to organizations that acknowledge their needs and execute them accordingly.

In India, the gratuity benefit is payable under the Payment of Gratuity Act, 1972.

This act governs the payment of gratuity for workers employed in factories, plantations, shops, mines, ports, railways, and other similar establishments.

Our team at Gotaxfile is here to help you probe into the nitty-gritty of gratuity calculation, qualification conditions, and payment.

Eligibility Criteria for Gratuity Calculation.

The employees who are eligible to receive gratuity fall in the list for gratuity calculation. The criteria for receiving this benefit is as follows:

If an employee retires:

It is often said, Human resources are the assets of a company. The responsibility of a business organization does not conclude when the employees bid goodbye to them. Instead, it sort of begins from that point in time. Employees who are looking to retire or have retired are eligible to apply for gratuity. It is their professional right to receive gratuity as a part of their services rendered in the organization. Some employees often have retired due to severe illness or injuries. In such scenarios, the family becomes the beholder of gratuity as a part of the employee compensation.

If an employee has a work period of a minimum of 5 years in the organization:

No benefits come easy, especially to a new hire. To attain the benefit of gratuity in an organization, an employee must have a work period of a minimum of 5 continuous years. Gratuity compliance can prove tricky; it should be properly assessed and calculated according to the working days of an employee.

In a typical gratuity calculation scenario of 5 years, a single year has 240 working days for white-collar employees working in an organization. For the blue-collar employees, a single year has 190 days.

For instance, if Mr. Alex has worked for 4 years and 8 months, it will be calculated as 5 years. Contrarily, if he works for 4 years and 2 months, it will be regarded as 4 years, and he will not be eligible to receive gratuity.

The 5 years of continuous service also involves unfortunate incidents like strikes, lockouts, accidents, leaves, layoffs, and termination of service not on the part of an employee. Even though it applies to employees having a continuous 5-year working period. But there are certain exceptions like demise or disablement of an employee.

If an employee dies or suffers any disability due to illness or accidents:

As stated above, an employee can receive gratuity if he suffers from any form of life-threatening illness, disablement, or dies. These are considered exceptions, and such repercussions receive due acknowledgment. Thus, there is no hampering of the compensation of the employees in certain cases.

If an employee is eligible for the superannuation:

According to this, an employee is eligible to receive gratuity at the time of his superannuation. Superannuation means to retire because of age or infirmity. A young employee aged 30 cannot decide to retire and claim to receive gratuity. Retirement age should be present. Based on this, a gratuity calculation is done by the organization for the superannuates.

How to undertake Gratuity calculation?

There are some important components business entities must consider for gratuity calculation. The amount is particularly dependent on the number of years served and the employee's last drawn salary.

The gratuity calculation formula:

Gratuity = NB15/26**

N= number of years served in the company
B= last drawn basic salary + Dearness allowance (DA)

To gain a quick understanding of gratuity calculation, let's take an example:

Neha has been working with a company for over 20 years now, and her last drawn salary amounted to Rs. 30,000 plus DA amount component, then,

The gratuity amount for Neha = 20 X 30,000 X 15 / 26 = Rs. 3,46,153.84

Exceptions for gratuity calculation

• The period of service is taken as a whole year if it is more than 6 (six) months. And if the service period is less than 6 (six) months, it is then rounded off to the previous year. If the service duration of an employee's work is for 8 years and 8 months, he will receive 9 years equivalent amount of gratuity, whereas if service duration is for 8 years and 2 months, he is liable to get paid for 8 years of gratuity only.

• Gratuity, as stated above, is a way of thanking the employees of an organization, a sort of tip. Therefore, the employer can decide to pay a higher amount. However, the amount should not exceed Rs. 10 lakhs.

• If the amount compensated is more than Rs. 10 lakhs, it is called ex-gratia. The law does not impose such payment. Hence it is considered a voluntary contribution by the employer.

Taxation aspect related to gratuity

The process of gratuity taxation depends on the employee receiving the gratuity amount. Two standard cases arise during the gratuity calculation.

When the gratuity amount is received by a government employee:

Any employee working under the central, state government, or any local authority receives the gratuity amount; then, the amount of income tax is exempt.

When the gratuity amount is received by a salaried employee from an employer who is covered under the act:

In such a case, the amount exempt from tax is the 15 days salary that was the last drawn salary of the employee.

When the gratuity amount is received by a salaried employee from the employee who is NOT covered under the act:

In such a case, the least of the listed following amounts are exempted from tax:

• Rs. 10,00,000 or
• The gratuity amount received by the employee and half a month's salary amount for every year of completed service rendered by the employee for his employer.

Right to Forfeit Gratuity Payment in exceptional cases

Meanwhile, under the following scenarios, employers can forfeit (cancel) the gratuity of the employees.

• Where the employee in question commits an offense
• Where the employee misconducts or misuses his power

Interestingly, the organization has to pay the gratuity to the employee even if it declares bankruptcy; no court can go against this right. Gratuity calculation and payment are crucial aspects for most business entities. Professional support can help you in streamlining this task to a large extent.

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