Gratuity is a reward paid by an employer to an employee for services rendered. Here is the math behind it.
Eligibility Criteria
To be eligible for gratuity, an employee must have completed at least 5 years of continuous service with the same employer.
The Formula
Gratuity = (15 * Last Drawn Salary * Years of Service) / 26
Where:
- Last Drawn Salary: Basic Pay + DA
- 15: 15 days wages per year
- 26: Number of working days in a month
Tax Exemption
Gratuity received up to ₹20 Lakhs is tax-free for government and private sector employees covered under the Payment of Gratuity Act.
Gratuity in Case of Death
The 5-year continuous service rule is waived if an employee passes away or becomes disabled due to an accident or disease. In such tragic cases, the gratuity is paid to the nominee or legal heir based on the tenure served.
Taxation on Gratuity
For government employees, the entire gratuity amount is tax-free. For private sector employees covered under the Payment of Gratuity Act, the least of the following is exempt: ₹20 Lakhs, actual gratuity received, or the formula-based calculation.
Nomination Rules
Every employee must file a nomination in **Form F** at the time of joining. This ensures that in the unfortunate event of the employee's death, the gratuity amount is paid to the rightful nominee without legal hassles.
Forfeiture of Gratuity
Gratuity can be forfeited by the employer if the employee has been terminated due to:
- Willful omission or negligence causing damage to company property.
- Riotous or disorderly conduct or any act of violence.
- Commitment of an offense involving moral turpitude.
Conclusion
Gratuity is a significant component of your retirement corpus. While it is a reward for long service, understanding the eligibility rules and tax exemptions helps you plan your finances better. Keep your nomination details updated and preserve your service records.