What is Gratuity: Gratuity is actually a gift that your employer gives you at the time of your departure in return for your years of service. Gratuity is a beneficial scheme that is a part of the benefits given at the time of retirement, and is given by the employer to the employee at the time of leaving or completion of the job.
On retirement from a job, along with provident fund and pension fund, a salaried person gets another amount, which is called gratuity. In today’s era, the idea of spending the entire career in one company has become outdated, and people change jobs frequently, but still gratuity is also given to those who have spent at least five years in one company. Now let us mention some such questions, which come to the mind of almost every salaried person at some time or the other – What is gratuity…? How is gratuity calculated…? When can I get gratuity…? Out of the amount that I will get in the form of gratuity, how much will be tax-free, on how much gratuity will I have to pay income tax……?
Many people wait for the gratuity that they get on retirement (or on changing jobs) so that they can fulfill their dreams that were left unfulfilled till then, or some routine expenses can be met through the gratuity amount. But as we said earlier, gratuity is such an amount about which many working people do not know anything in detail, and are usually found asking questions to their colleagues, the accounts department of the office or sometimes to a chartered accountant. So today we have brought for you the answers to all such questions that may have come to your mind about gratuity at some time or the other.
What is gratuity…?
Gratuity is actually a gift that your employer gives you at the time of your farewell in return for your many years of service. Gratuity is a benefit scheme which is a part of the retirement benefits and is given by the employer to the employee at the time of leaving or completion of the job.
When can one get gratuity?
Gratuity is given to every employee who has worked continuously for 4 years, 10 months and 11 days before leaving his job or retiring. The job of every such employee is considered as continuous service of five years. As per the rules, any employee is considered entitled to gratuity only after five years of service. So, remember, if you have a habit of changing jobs frequently every year or two, then you will never get the amount of gratuity.
How to calculate gratuity?
Salary is received every month, and so is its pay slip, so every employed person knows how much basic salary he got, how much dearness allowance (DA), how much house rent allowance (HRA) he got, and how much income tax was deducted. But not everyone knows how to calculate how much gratuity will be given on changing jobs or retiring, or how much gratuity the employed person is entitled to. So, today we tell you the formula to calculate gratuity, which is not at all difficult. Gratuity is not given for working for less than five years in any job, but if you spend more time in the company, you are entitled to gratuity for the entire service period. After completion of five years of service, the basic salary of the last month of service, i.e. the basic salary and dearness allowance are added (those who do not get dearness allowance will have to calculate only with the basic salary), is multiplied by 15 for every year completed in the job. After this, the amount received is multiplied by the number of years spent in service, and finally the amount obtained is divided by 26 – that is it, the amount of gratuity you get.
That is, the formula to calculate gratuity is –
[(Last month’s basic salary + dearness allowance) x 15 x years of service] / 26
Now let’s take an example
Suppose, you worked in a company for 21 years, 11 months. Your last basic salary in that company was ₹50,000, on which you were also given ₹25,000 dearness allowance (DA). Now understand, in this case your service period will be counted as 22 years. Now you will add the amounts of ₹50,000 and ₹25,000, and now you will get an amount of ₹75,000, which will have to be multiplied by 15. Now you will see ₹11,25,000. Now multiply this amount by the total years of service, i.e. 22. After this, the amount that you will get is ₹2,47,50,000, which will have to be divided by 26 as the last step of the formula. Now the amount that you will see will be ₹9,51,923, and this will be the gratuity you will get.
What part of the gratuity is tax-free…?
If the gratuity you get has been calculated by the formula written above, and your employer has not given you any amount as a gift, then up to ₹20,00,000, that is, the amount less than this received as gratuity will remain completely tax-free, that is, you will not have to pay any kind of tax on that entire amount.
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