The gratuity fund is a statutory benefit provided by employers to their employees as a token of appreciation for their service. In India, the Payment of Gratuity Act, 1972 governs the rules related to gratuity. Understanding the concept of gratuity, its calculation, eligibility, and the associated tax implications is essential for both employers and employees.
Gratuity is a lump sum payment made by an employer to an employee as a gesture of gratitude for their services. This benefit becomes payable under certain conditions such as resignation, retirement, or upon the employee's death or disablement.
The formula for gratuity calculation depends on whether the employer falls under the purview of the Payment of Gratuity Act. For employers covered under the Act, the formula is:
Here, the last drawn salary includes basic salary and dearness allowance. The factor 15 represents 15 days of salary per year of service, and 26 represents the number of working days in a month.
For employers not covered under the Act, the calculation might differ, often based on company policy.
An employee becomes eligible for gratuity under the following conditions:
The tax treatment of gratuity depends on the recipient's category:
If the gratuity amount exceeds the exempt limit, the excess is taxable under the head "Income from Salaries." The employer is required to deduct TDS accordingly.
Gratuity received on the death of an employee is fully exempt from tax, regardless of the amount. The same exemption applies to gratuity received by nominees or legal heirs.
Proper planning can help employees maximize the tax benefits of gratuity. Here are some tips:
The gratuity fund is a significant component of employee benefits and ensures financial security after employment. While the tax implications may seem complex, understanding the rules and exemptions can help employees make the most of this benefit. Employers should also stay updated with regulations to ensure compliance and foster goodwill among employees.