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  • Gratuity – Check Gratuity Calculation and Meaning

    Out of the several components that make up the gross salary of a salaried individual, gratuity is one. Gratuity is a benefit payable under the Payment of Gratuity Act passed in the year 1972.

    What is Meant by Gratuity?

    Gratuity is a sum of money paid by an employer to an employee for services rendered in the company. However, gratuity is paid only to employees who complete 5 or more years with the company. It can be understood as a form of tip paid by employer to the employee for services offered in the company. Since tips are a function of culture, various countries have various gratuity limits that are doled out by employers.

    How does Gratuity Payment Work?

    An employer may offer gratuity to his/her employees from his/her own pocket or may take a group gratuity plan with an insurance provider. Annual contributions are then paid by the employer to the insurance provider for this. The employee too can contribute to his/her gratuity amount. The gratuity paid by the insurance company is based on the clauses in the group insurance scheme.

    Gratuity
    GRATUITY

    Payment of Gratuity Act, 1972:

    The payment of Gratuity Act was passed in the year 1972 and covers employees engaged in mines, factories, oil fields, plantations, companies, ports and other such establishments which have more than ten employees. The gratuity amount unlike provident fund is totally paid by the employer without any contribution from the employee.

    Eligibility Criteria for Gratuity Payment:

    Following are the few instances when you will be eligible to receive gratuity.

    1. An employee should be eligible for superannuation
    2. An employee retires
    3. An employee resigns after working for 5 years with a single employer
    4. An employee passes away or suffers disability due to illness or accident

    Formula for Calculation of Gratuity Amount:

    Listed below are the components that go into calculation of gratuity amount. The amount is also dependent upon the number of years served in the company and the last drawn salary.

    If,

    N = number of years of service in a company

    B = last drawn basic salary plus DA

    then,

    Gratuity = N*B*15/26

    For example, if Amit is an engineer who has worked with SF Company for 20 years of service and had Rs.25,000 as his last drawn basic plus DA amount, then,

    Gratuity Amount for Amit = 20*25,000*15/26 = Rs.2,88,461.54

    However, an employer can choose to pay more gratuity to an employee (since it is a form of tip as mentioned in the beginning) but then the amount as restricted by the Gratuity Act cannot exceed more than Rs.10 lac. Anything above the amount Rs.10 lac is known as ex-gratia which is a voluntary contribution and not something compulsorily imposed by the law.

    Also, for the number of months in the last year of employment, anything above 6 months is rounded off to the next number while anything below 6 months in the last year of employment is rounded off to the previous lower number. So, a job held for 6 years 7 months will fetch you gratuity amount for 7 years while that held for 6 years and 4 months will fetch you gratuity amount for 6 years.

    Taxation Process of Gratuity:

    The taxation process for gratuity depends upon the employee who is receiving the gratuity amount. Two standard cases arise for the calculation of tax on gratuity:

    1. Government Employee Receiving Gratuity Amount:

    In case any employee under the state government, central government or local authority receives gratuity amount than the amount is fully exempt from Income Tax.

    1. Any Other Salaried Individual Receiving Gratuity Amount from an Employer who is Covered by Payment of Gratuity Act:

    In case of gratuity received by any employee whose employer is covered under the Gratuity Act, the following amount is exempt from tax.

    • 15 days salary as per the last drawn salary of the individual

    1. Any Other Salaried Individual Receiving Gratuity Amount from an Employer who is not Covered by Payment of Gratuity Act:

    In such a case the least of the following three amounts is exempt from tax.

    • Rs.10,00,000
    • Gratuity actually received by employee
    • Half month's salary for every year of service that the employee has completed with the employer

    Gratuity Rules

    Forfeiture of Gratuity

    According to the Payment of Gratuity Act of 1972, an employer holds the right to forfeit their gratuity payment, either wholly or partially despite the employee having completed 5 and more years of service in a company. The only situation where this works is when the employee has been terminated due to disorderly conduct wherein he/she tries to physically harm individuals during the course of his/her employment.

    Timeline for Gratuity payment

    There are three steps involved regarding gratuity payment. These include:

    • Initiation: An individual or a person authorised must send in an application to an employer regarding the gratuity he/she is owed by a company.
    • Acknowledgement and calculation: As soon as the application is received, the company which owes gratuity will calculate the amount and also provides a notice of the same to the individual and the controlling authority with the amount specified.
    • Disbursal: The employer, having sent the acknowledgement, has a time period of 30 days to pay the gratuity amount to the individual.

    Tax exemptions on gratuity for Assessment Year 2016-17

    Based on the policy changes made during the 2016 budget, here’s what gratuity laws looks like:

    • According to Article 10 (10) i of the Income Tax Act, any gratuity received by government employees, apart from statutory corporations, is fully exempt of tax.
    • According to Article 10 (10) ii of the Income Tax Act, death and retirement gratuity receivable by an employee covered under Gratuity Act 1972 is the least amount of the following that is exempt from tax:
      • (*15/26) X Last drawn salary** X completed year of service or part thereof in excess of 6 months.
      • Rs.10 lakhs.
      • Gratuity amount that is actually received.

    * 7 days in case an individual is an employee of a seasonal establishment.

    ** Salary amounts to the total salary received by an employee including Dearness Allowance and excluding any other benefits like bonus, HRA, commission, and any other such perquisites.

    • According to Article 10 (10) iii of the Income Tax Act, exemption for gratuity amount received by individuals who are not covered under Gratuity Act of 1974 are as follows:
      • Half month’s Average Salary* X Completed years of service
      • Rs. 10,00,000 3. Gratuity actually received.

    *Average salary = Average Salary of last 10 months immediately preceding the month of retirement ** Salary = Basic Pay + Dearness Allowance (to the extent it forms part of retirement benefits)+ turnover based commission

    Few Significant Points about Gratuity:

    Following are some of the most prominent points about payment of gratuity by an employer to an employee.

    • An employee can receive a gratuity amount higher than Rs.10,00,000 from his/her employer, the exemption for tax in this case will be calculated as per the points listed above under taxation.
    • The employer has the right to reject payment of gratuity to an employee if he/she has been asked to leave his/her job owing to any misconduct.
    • In case of death of the employee, the nominee or heir of the employee is paid the gratuity amount. The taxation for this is calculated for the receiver under the head – income from other sources.

    Frequently Asked Questions: Gratuity

    1. If I resign from a company after 4.5 years of service, am I eligible for gratuity?

      A) No, you have to serve at least 5 years in a company to get gratuity payment. A Madras High Court ruling held that you can avail gratuity if you have completed 240 days of service in the fifth year. It is best to check with the HR of your company about this. However, if someone dies while in service, the gratuity amount will be paid to their legal heir even if they have not completed 5 years of service. In addition, the amount received by a nominee/heir will not be taxed.

    2. I am a contract employee in a company. Will I get gratuity if I resign or retire after 5 years?

      A) If you are on the company rolls and are considered an employee of the company, then you will receive gratuity. However, if you are under a contractor that is separate from the company then the gratuity should come from the contractor and not the company.

    3. What kind of employees does the Gratuity Act, 1972 cover?

      A) Payment of Gratuity Act, 1972, applies to employees of factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments related to them. All kinds of government jobs have also been included under the purview of this act. It is applicable in all states of India except Jammu and Kashmir.

    4. Is there any difference in calculation of gratuity for employees who are not covered under the Gratuity Act?

      A) Even if you are not covered by the Gratuity Act, your employer may pay you gratuity. The calculation for this is: Gratuity = Average salary (basic + DA) * ½ * Number of service years. In this case, the service years are not rounded off to the next number. So if you have a service of 12 years and 10 months, you get gratuity for 12 years and not 13 years.

    5. Is there a cap to the amount I can receive as gratuity?

      A) Yes. A company cannot pay you more than Rs. 10 lakh as gratuity, irrespective of the number of years you have completed. This limit is also applicable to gratuity you can receive from different employers during your lifetime. If your company wishes to pay you more money, they can title it under ex-gratia or bonus.

    6. How do I nominate someone to receive my gratuity in case of my death?

      A) To nominate one or more heirs for your gratuity amount, you need to fill in Form F when joining a company.

    7. How many days will it take for the employer to remit the gratuity amount?

      A) Usually, gratuity is released along with or just before/after your full and final settlement is done. The government mandates employers to pay the amount within 30 days. If there is any delay in payment, the employer has to pay a simple interest on the amount from the due date until the date when payment is made.

    News About Gratuity

    • E-Way Bill System Becomes Compulsory For Inter-State Transfer of Goods

      The e-way bill system has been made compulsory by the Indian government from the 1st of April, 2018, for the inter-state transfer of goods. The system falls under ambit of the Goods and Services Tax which was implemented on the 1st of July, 2017. This bill is essentially a document that must be carried by any individual who is in charge of conveyance of products from one state to another. The bill can be generated online from the portal, and also through SMS, Android app, Bulk Upload Tool, etc. The reason for the implementation of the system is that taxpayers must upload all the information regarding every transaction they undertake to a common portal online, and once they upload the details, the portal will automatically generate a bill that will help in verification by stakeholders.

      4 April 2018

    • Parliament Passes the Gratuity Amendment Bill

      In order to raise the tax free gratuity limit to Rs.20 lakh, the Parliament finally passed the Gratuity Amendment Bill of 2017, last week. By making use of an executive order, the Indian Government is expected to restore the retirement benefit stratagem as well.

      15 March 2018 marked the day when Rajya Sabha came through with the Amendment bill, which was shortly followed by approval from the Lok Sabha. Additionally, the period of maternity leave is also expected to undergo a breakthrough, without imposing complete law amendment.

      Prime Minister, Narendra Modi stated that this bill is significantly pro people and will thereby end up reaping benefits for more than lakhs of Indian citizens.

      23 March 2018

    • ICDS and GST Talks to Be Held By City ICAI

      The Chartered Accountants of India (ICAI) from the city of Bhubaneswar recently put together a summit on ‘’The Implication of ICDS and GST on Preparation of Final Accounts’’.

      A detailed discussion on ICDS and its effect on auditor’s perspective and the importance of GST in the same regard. With regards to the preparation of final accounts, a proposal in detail was submitted that covered all aspects of GST and ICDS coupled with their implications on the very matter.

      More than 200 members are believed to have attended the session.

      21 March 2018

    • GST Council approves rollout of e-way bill from April

      The Goods and Services Tax (GST) Council has extended the present system of return-filing by three months and thus businesses will continue to file summary sales return GSTR-3B till June. After the council meeting, the Union Finance Minister Arun Jaitley briefed to the media that the e-way bill or electronic way bill for inter-state movement of goods will be put into action from 1 April 2018. Whereas, the e-way bill for intra-state movement of goods will be rolled out in phases beginning 15th April and would cover all the States by 1st June.

      The Council has now revised and made major improvements in the rules which are as follows:

        • The e-way bill will be generated after excluding the value of exempted goods from the value of the consignment.

        • Transporting goods by public transportation has been included as a mode of transport and thus the e-way bill generation for movement of goods by public conveyance will be the responsibility of the consignor or consignee.

        • Generation and carrying of e-way bill has been exempted for railways under the condition that railways will not deliver the goods to the recipient without the production of e-way bill. However, invoice or delivery challan is to be carried by the railways.

        • The validity period of the e-way bill will be the time period taken by the recipient to inform his acceptance or rejection of the consignment or 72 hours, whichever is prior.

        • The registered job worker for a job-work can generate e-way bill in case of movement of goods.

        • The ministerial panel under Sushil Modi has been assigned the responsibility to delineate a single-page form for simpler and evasion-proof GST return.

      Tax exemptions have also been extended by six months for exporters, till September.

      17 March 2018

    • Mobile Counters Opened by Rajamahendravaram Municipal Corporation To Collect Tax

      Vajiyarama Raju, the Commissioner of the Rajamahendravaram Municipal Corporation, has revealed that the body has come up with mobile counters to collect taxes. The commissioner added that the programme was started as part of the reforms the body had in mind. He also said that 47th Division’s Siddartha Nagar High School now has a mobile counter where taxes will be collected. He urged the public to use this counter to make payments towards property tax, tax on vacant and empty lands, and water tax. He also said that rather than visiting the Corporation Office or e-Seva Centres, mobile counters should be used for the payment of tax.

      6 March 2018

    • Tally Gets Major Boost Thanks to GST

      Tally – the oldest accounting software in India, received a major boost thanks to the implementation of the Goods and Services Tax. The engineering and product teams of the company, until October 2016, were establishing a POS (point of service) technology solution and eyed the retail side, with a projected 20 million shopkeepers. However, the project didn’t quite actualise as planned. But the GST regulations would mandate India’s SMEs to comply with the latest and more complex laws by filing their returns on the GST Network, and therefore Tally paid attention on refining Tally ERP – the company’s flagship accounting software.

      3 March 2018

    • Meagre budgetary allocation for children in Union Budget 2018

      Children constitute 39% of India’s population and the Union Budget has failed to recognise the need for good health and education for the children. Only 3.24% of resources have been allocated for children. This is a 0.08% drop from the previous budget. The resource allocation for prevention of alcoholism and drug abuse has been reduced by 27.54%. The share provided to the National Creche Scheme was cut by 35.8%.

      Children are affected by quite a few issues and the vulnerabilities have risen of late but the government seems to have neglected the need to provide solutions. According to a survey, out of the total population of 5-year-olds, 38% of them are stunted and 58% of them are anaemic. Child rights experts have stated that crimes against children have risen and so have the cases of juveniles.

      12 February 2018

    • Aadhaar Update Could Soon Attract 18% GST

      Updating your Aadhaar details, which now costs Rs.25, is expected to become more expensive as the UIDAI (Unique Identification Authority of India) aims to implement 18% GST on the services. Reports suggest that the tax will be applicable to only certain services and not all Aadhaar-related services. At the moment, the fee applicable for demographic updates such as changes in name, date of birth, email ID, mobile number, address and gender is just Rs.25, but it could rise to Rs.29.5 if the 18% tax is added to it.

      7 February 2018

    • New industrial policy for Punjab offering SGST exemption for ‘thrust’ sectors

      The Punjab government has introduced a new industrial policy with an aim to boost the economic activity and industrial growth in the state. The new policy will provide 100% State Goods and Services Tax (SGST) exemption to ‘thrust’ sectors such as technical textiles, high-tech manufacturing, food processing, footwear and accessories, electronics, etc.

      The Chief Minister of the state mentioned that the Punjab Industrial and Business Development Policy 2017 will improve investments and aid in the growth of industries.

      The CEO of Walmart India, Krish Iyer, mentioned that the retail giant entered the Indian market from Amritsar. He said that the state government has done a great job with its effective single-window system and e-governance.

      Walmart has now opened its second store in Punjab and has signed several agreements for expansion in the state.

      13 November 2017

    • SMEs May Receive Relaxation in Compliance Burden from the Government

      Policymakers have been considering means through which the compliance burden associated with GST can be eased for small businesses. They are also aiming at making product classification for taxation simpler, according to Hasmukh Adhia, the revenue secretary. There may be readjustment of tax rates because of the simplification process, which could potentially result in a reduction in rates for some of the products that are taxed at 28%. Adhia said that resolving the issues faced by small and medium scale enterprises and harmonising the products for better tax compliance is one of the main aims of the government at the moment.

      07 November 2017

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