Gratuity

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santhana krishnan

santhana krishnan (Querist)
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03 July 2015 dear sir please explain the gratuity concept.

RAMESH KUMAR VERMA

RAMESH KUMAR VERMA (Expert)
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06 July 2015 Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company.

Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job. An employee may leave his job for various reasons, such as - retirement/superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement.

Eligibility
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As per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee completes 5 or more years of full time service with the employer(minimum 240 days a year).Gratuity is paid to employee out of Gratitude by employer if an employee complete 5 years of continuous service with the organisation.Gratuity will be calculated as

Basic + DA *15*No of years of service / 26

Let’s understand the above math clearly with an example:
Varun had been working with an IT company since past 10 years, 7 months. He is retiring on 15th April, 2010. His current Basic = Rs 40,000 pm, DA = Rs 5,000 pm. He is going to receive a gratuity amount of Rs 3 lakhs on retirement. Note: Varun’s basic and DA have been the same since past 1 year.

Lets consider 2 situations here – (a) Varun’s employer is covered under Payment of Gratuity Act, 1972; and (b) Varun’s employer is not covered under Payment of Gratuity Act, 1972.

• Salary = Basic + DA = Rs 40,000 pm + Rs 5,000 pm = Rs 45,000 pm
• Average salary = 10 months’ salary (immediately preceding the month of leaving the job)/10 = (Rs 45,000 pm * 10)/10 = Rs 45,000 pm. Therefore, half-month’s average salary is = Rs 45,000/2

Important points to remember
• Generally, only government employers give DA to their employees. Above example is only for illustrative purpose.
• The salary of the employee may differ over a period of time on account of change in basic, DA and/or other factors.
• In case gratuity is received from more than one employer during the previous year, maximum exemption allowed is up to Rs 10,00,000.
• Where employee has already claimed gratuity exemption in any previous year (s), the maximum exemption amount allowed for the current previous year i.e. Rs 10,00,000 will be reduced by the amount of deduction already claimed in the previous years.
• In case of an employee who is employed in a seasonal establishment ( not employed throughout the year), the gratuity exemption shall be for seven days wages for each season.

more info:
http://www.whatishumanresource.com/the-payment-of-gratuity-act-1972