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Understanding Gratuity: What it is and How it Works for Employees

Introduction: What is Gratuity?

Gratuity is a lump sum payment made by an employer to an employee as a reward for their long and loyal service. It is a type of retirement benefit that is payable when an employee leaves their job after completing a minimum period of service. In this blog post, we will explain what gratuity is, who is eligible for it, how it is calculated, and when it is paid.

Who is Eligible for Gratuity?

Gratuity is payable to all employees who have completed a minimum period of service with their employer. In India, a minimum of five years of service is required to be eligible for a gratuity.This means that an employee who has worked with the same employer for five or more years is entitled to receive gratuity when they leave their job.

How is Gratuity Calculated?

The amount of gratuity payable to an employee is based on their last drawn salary and the number of years they have worked with their employer. The formula used to calculate gratuity is as follows:

Gratuity = (Last Drawn Salary x 15 x Number of Years of Service) / 26 In this equation, the employee’s basic salary and dearness allowance are referred to as the “last drawn salary.” The number of days in a month is represented by the factor 15, and the number of working days in a month is represented by the factor 26. The maximum amount that can be given as a gratuity to an employee is Rs. According to the Payment of Gratuity Act of 1972, twenty lakhs.

Learn more: How is 5 years gratuity calculated?

When is Gratuity Paid?

Gratuity is paid to an employee when they leave their job after completing the minimum period of service required to be eligible for it. This can be due to retirement, resignation, or termination. The employer is required to pay the gratuity amount to the employee within 30 days of the date on which it becomes payable.

Tax Implications of Gratuity

Gratuity is taxable under the Income Tax Act, 1961. However, there are certain tax exemptions available based on the type of employee and the employer. For example, employees covered under the Payment of Gratuity Act, 1972 are eligible for a tax exemption on their gratuity amount, up to a certain limit. It is important for employees to understand the tax implications of gratuity to avoid any unexpected tax liabilities.

Conclusion: The Importance of Gratuity for Employees

Gratuity is an important retirement benefit for employees that recognizes their long and loyal service to their employer. It provides financial security to employees after they leave their job and can help them to plan for their future. Employers should ensure that they comply with the Payment of Gratuity Act, 1972 and pay gratuity to eligible employees in a timely and accurate manner. By understanding how gratuity works, employees can take advantage of this important benefit and plan for their retirement with confidence.

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