Know your gratuity benefits :: Business Line

If you stay on with your employer for 5 years or more, you will be entitled to gratuity when you resign, retire or are retrenched.

Job-hopping can increase your pay, but good old loyalty also has its perks. Stay on with your employer for five years or more, and you are entitled to gratuity when you resign, retire or are retrenched. This monetary reward to be paid by your employer in recognition of your years of service is mandated by the Payment of Gratuity Act. Most establishments employing 10 or more workers fall under the Act.

The amount you get as gratuity depends on the number of years you have served and the last drawn monthly salary. Roughly, you get half a month’s Basic and DA for every completed year of service. Here’s the formula to calculate gratuity: (Number of years of service) * (Last drawn monthly Basic and DA) *15/26. So, if you have served 30 years and draw monthly Basic and DA of Rs 20,000 when you leave the job, you get gratuity of Rs 3,46,154 calculated as (30 * 20,000 *15/26). Your employer can choose to pay you more but the maximum amount of gratuity according to the Act cannot exceed Rs 10 lakh. Amount paid above this will be in the nature of ex-gratia — something voluntary and not mandated according to law.

If you serve more than six months in the last year of employment, it is considered as a full year of service. For instance, if your tenure is 30 years and 7 months, the years of service for gratuity calculation will be rounded off to 31. But if you serve 30 years and 5 or 6 months, then the number of years of service will be considered as 30.

Waiving the rule

Going by the book, gratuity is payable only if you have been with the employer for five years or more. But this rule is waived if an employee dies or is disabled. In such cases, gratuity is paid to the nominees or to the employee, even if the tenure is less than 5 years.

Even employees not covered under the Payment of Gratuity Act are entitled to gratuity. But in such cases, the formula for gratuity calculation differs. It is computed as the (number of years of service) * (average monthly salary in the last 10 months of employment) * (15/30). This computation makes the gratuity amount lesser than that under the Act. For instance, in the above example, an employee not covered by the Act will be entitled to Rs 3,00,000 as gratuity, calculated as (30 * 20,000 * 15/30). This is Rs 46,154 lower than employees covered under the Act are entitled to. Another difference is that only fully completed years of service are considered in the calculations, and partial service in the last year, even if it in excess of six months, is ignored. For instance, service of 30 years and 7 months, will be considered as 30 years and not 31 years.

Another positive is the favourable tax treatment that gratuity receipt enjoys. Tax treatment

If you are a government employee, then the entire amount you get is exempt from tax. If you are not a government employee but are covered under the Act, you get tax deduction for an amount which is the lower of the following:

a) Actual gratuity received

b) 15 days Basic and DA for each completed year of service (according to calculations in the example above)

c) Rs 10 lakh

Say, in the instance above, your employer paid you gratuity of Rs 5,00,000, which is more than the Rs 3,46,154 actually payable under the law. You will enjoy tax deduction on Rs 3,46,154 and the surplus Rs 1,53,846 will be subject to tax. Note that the total tax deduction on gratuity amounts received, including those from previous employers in earlier years, cannot exceed Rs 10 lakh.

Employees not covered under the Payment of Gratuity Act are also entitled to tax deduction on the amount they receive. The deduction rules are similar to those applicable for employees covered by the Act.

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