Gratuity - your Retirement Trump Card

Gratuity receipt is one of the important components of retirement corpus. It is a right of every employee, who renders long years of hard work, sincerity and dedication towards the organization.   

Gratuity is best described as payment made by employer as gratitude to their employees for their services to the organization. However, now this payment is no more voluntary but mandated by law. Gratuity is governed by law of Payment of Gratuity Act 1972. 

Where is the law of Gratuity applicable?

This law is applicable to all shop or establishment which has 10 or more people working in it throughout India except in Jammu & Kashmir. The other important criterion for its applicability is continuous service requirement of five years of the employee. It is paid to an employee when he retires, leaves the company or on his death.  In case of death, it is not necessary for employee to complete five continuous years in the company. 

How is gratuity calculated?

The simple way to calculate Gratuity is multiply no of years of service with 15 days of basic pay including dearness allowance (calculate for 26 working days in a month) 

i.e. No of Years x 15/26 *Last drawn Salary

Taxation of gratuity 

The gratuity proceeds received by any Government employee are exempt from tax. In case of any other employee the tax exempt is subject to minimum of the following:

a) Maximum of Rs 10 lakhs

b) Actual Gratuity received or

c) 15 days salary x every completed year   

How does the employer pay gratuity to his employees? 

An employer usually purchases any group gratuity product made available by Insurance Company. The company pays an annual premium to the insurer for the gratuity funds. The amount keeps on fluctuating depending upon the addition and deletion in work force. Today, all leading insurance companies have group insurance products for gratuity and pension.