5 Key Facts About Gratuity in Salary

Gratuity is a significant component of an employee's financial benefits, often received at the end of their service. While many have heard the term, few truly understand its implications. In this article, we’ll break down the 5 key facts about gratuity in salary, including what is gratuity in salary and how is gratuity calculated in India.

1. What is Gratuity in Salary?

Gratuity is a lump sum amount paid by an employer to an employee as a token of appreciation for services rendered over a long period. It is governed by the Payment of Gratuity Act, 1972 in India. To be eligible, an employee must have completed at least five years of continuous service in the same organization.

Gratuity is not deducted from your salary but is a benefit paid in addition to your earnings. It acts as a financial cushion, especially for employees nearing retirement or those resigning after long service.

2. Eligibility Criteria for Gratuity

Not every employee qualifies for gratuity. Here are the basic eligibility conditions:

• The employee must have completed five or more years of continuous service.
  
• The organization must be covered under the Payment of Gratuity Act, 1972.
  
• It applies to all employees working in factories, mines, oilfields, ports, railways, and establishments with 10 or more employees.
  

3. How is Gratuity Calculated in India?

Understanding how is gratuity calculated in India is vital for financial planning. The formula for gratuity calculation under the Gratuity Act is:

Gratuity = (Last drawn salary × 15 × number of completed years of service) / 26

Where:

• Last drawn salary includes basic salary + dearness allowance.
  
• 15 is the number of days' salary considered for each year of service.
  
• 26 is the number of working days in a month as per the Act.
  

Example:

If your last drawn salary is ₹50,000 and you worked for 10 years:

Gratuity = (50,000 × 15 × 10) / 26 = ₹2,88,461.54

4. Tax Implications on Gratuity

Gratuity is tax-free up to a certain limit. As per current tax laws:

• For government employees, the entire gratuity amount is exempt from tax.
• For private sector employees, the tax-free limit is ₹20 lakhs.
• Any amount exceeding this limit is taxable under the Income Tax Act.

5. Gratuity Payment Timeline and Process

Employers must pay the gratuity within 30 days from the date it becomes payable (typically upon resignation, retirement, or death of the employee). In case of delay, the employer is liable to pay interest on the amount.

Process:

1. The employee submits a gratuity claim.
2. The employer calculates and processes the amount.
3. Payment is made through cheque or bank transfer.

Conclusion

Gratuity plays a vital role in post-employment financial stability. Knowing what is gratuity in salary and how is gratuity calculated in India empowers employees to understand their rights and plan their financial future. Always keep track of your service duration and salary components to estimate your potential gratuity amount effectively.