Benefits of Gratuity in India
Introduction
How many of you are in the verge of full and final settlement? Are you someone who is in the stage of retirement or superannuation? Or any of your family members or friends faces death during employment period ? So then you might curious to know about Gratuity benefits.
What is the meaning of Gratuity benefits ?
Meaning of Gratuity is the ex gratia payment made to employe for the time and energy served to the company. To compensate that dedication and sacrifice employer required to secure its old age providing a financial security at the time of retirement.
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Basically Gratuity is not what you works for but it is for what you loose by working for your employer. To be specific it is the a kind of compensation of your valuable time and energy that you compromise by creating value for your with your skill and abilities.
ELIGIBILITY OF GRATUITY
An employee needs to provide a continuous service of 5 years in an organisation to become eligible for Gratuity.
What is the total days of continuous service to be served on last year ?
After completion of 4th year, on the verge of 5th year total 240 days of continuous service for the eligibility of gratuity.
Why 240 days is considered as one year?
As per Section-25b of Industrial dispute act,1948 service of 240 days is regarded as 1 year. And as per Factories act,1948 after completion of 240 days of service an employee is eligible for earned leave.That is why 240 days is considered as 1 year for eligibility of gratuity.
In which cases gratuity is forfeited ?
If any employee does below mentioned action, then his or her gratuity shall be forfeited.
- Theft cases
- property damage of employer
- Fraud case
- Embezzlement of Money or Money Laundering
OBJECTIVE OF GRATUITY
Historically Gratuity was paid on voluntary basis by considering the amount of time and energy that an employee put during the time of employment. At the time of retirement an employee do not have energy and enthusiasm to work for himself or herself. Thus earlier industrial owners thought let the time and energy of the employee to be compensated with some amount lump sum money.
Gradually it becomes statutory. Employees start makes cases in the court against employers to avail that money. And obviously Legal systems thought it was such an important thing that generally ignored .
So the objective of Gratuity is very clear. It is there to provide a gratis amount of money to compensate after work of the employees. It is coming under the retrial component of Employee CTC.
What is Gratuity pay in Salary?
Gratuity is the retiree benefits of Salary.It is calculated upon the basic salary of Employee.
What is Gratuity payout after 5 years of service?
After completing 5 years of continuous service employee is eligible to gratuity payment.
Gratuity payout =15/26*Basic Salary * Total number of years of service
How to calculate Gratuity ?
Gratuity is calculated as half monthly salary per annum. It depends upon the number of years of service an employee worked on the Organisation. Amount of Gratuity = Basic Salary *15/26* Number of years of service
Benefits Of Gratuity
- Free lump sum amount after retirement or Superannuation.
- In Case of Death and disability employees are immediately eligible for Gratuity.
- No wage ceiling or Salary restrictions for gratuity.
- Gratuity can not be deducted by employer .
- Maximum Gratuity limit is 20 Lakhs
- Tax is levied after 20 lakhs on the exceeding amount.
Gratuity Calculation Formula :
Amount of Gratuity = Basic Salary *15/26* Number of years of service
Basic Salary means last drawn basic salary.
number of years of services means how many years of service the particular employee rendered to the company
Gratuity Calculation for private employees
In many private Organisations monthly 20 days or full month basic salary is provided per annum instead of 15 days as per law.
It is good for employees if employer is providing more than statutory provisions.
Gratuity Percentage
Why 26 is divided while calculating Gratuity?
In a month generally 30 days is constituted but during calculating gratuity weekly off is excluded so 26 days is considered in the time calculation of gratuity.
What is 15/26 of Gratuity Calculation?
The logic is quite simple.15 on numerator indicates the half monthly wages or salary per year to be calculated as Gratuity.26 on denominator indicates a month excluding 4 weekly offs.
POINTS TO TAKEN INTO MIND
- Impacts to CTC: Gratuity is considered as retirement benefits,So it is shown as retiral component in CTC structure.Means it can not be paid to employees month by month rather it should be paid as lump sum after being eligible.
- Impacts of Tax: Gratuity has ceiling of 20 lakhs,If any Organisation willing to pay its employee more than that then tax will levied on the extra amount paid to employee as per Income tax rule.
- Loss due to switching Orgnaisation: As you know eligibility for gratuity is 5 years of service rendered to Organisation but if any employee leaves organisation after serving let say 4 years his or her gratuity will be forfeited.
CONCLUSION
Gratuity is no doubt a worthy benefit of employee.One who spent a decent amount of year in a company he will draw a remarkable gratuity amount.
In conclusion I can say aware yourself about gratuity from your HR representative. Hope this article help you to understand how to unveil profit of gratuity.
Is gratuity meant for Apprentice?
No, because gratuity is meant for employees however apprentice are not employee of Organisation.
Is there any wage ceiling for gratuity.
No, Gratuity is irrespective of Wages.
Who is eligible for Gratuity
Every employee who has rendered a continuous service of 5 years or more will be eligible.
If an employee have been superannuated and reemployed without breaking of services then he is eligible for payment of Gratuity.
When Gratuity is payable.
Gratuity is payable at the time of Superannuation. It may be at the time of retirement. Termination of services, Death or disablement due to any kind of accident
Is it necessary of condition of 5 years of service in case of death & disablement?
No. It is not necessary of condition of 5 years of service in case of death & disablement.
What is continuous service means ?
It mean uninterrupted service rendering, it includes service interrupted due to sickness, accident, absent due to leave, layoff, strike or lock out, Cessation of work due to the fault of Employer.
What is continuous service means for One year ?
For one year it means that 240 days for non-seasonal employment, & 120 days for seasonal employment.
What is gratuity Calculation formula ?
For non seasonal employment: 15 days of wages X No of completed years of service/26
For seasonal employment: 7 days of wages X No. of seasons he has been employed
What is the meaning of wages as per gratuity calculation ?
Wages means for gratuity calculation is the last drawn wages by the employee
15 days of wages = Last drawn wages X 15/26
What is the maximum gratuity to be Payable
Gratuity amount shall not exceed 20 lakhs
Is Gratuity is taxable.
Yes, Gratuity amount exceeding 10 lakhs is taxable under Income tax act
While calculating of continuous service of 240 day per year, is Weekly holiday & public holiday included or not.
Weekly off & Public holidays shall be included while computing Continuous service because the cessation of work on weekly off & Public holidays is not the fault of Employees.
Is gratuity liable on Principal Employer for Contract employees
No. For contract employee’s gratuity liable on Contractor
What is the logic behind 4.81% for gratuity Calculation?
Per year 15 days wages to be payable
For 1 year 12 month , For 1 month 26 days is considered
Now for calculating 1 year it will be 12*26 =312 days
15 Days is how much percentage of one year= (15/312)*100=4.80769( Which is equivalent to 4.81 % )
Is it a company refuse or deny gratuity due to financial loss.
No, A company can not refuse or deny gratuity even if it is having financial loss.
Is principal employer liable to pay gratuity if Contractor fails to pay to its employees.
Yes, Ultimately Principal Employer is responsible for the payment of gratuity to Contractor employee if contractor failed to make payment. Then Principal Employer may debit the same amount from contractors Bill.
Who will be the controlling authority for the establishment having branches in various states
Central Government,Both employer and employee are obligated to central government for gratuity .
Whether Gratuity calculated on Gross wages
No. Gratuity calculated on basic wages+ dearness allowances. HRA and other allowances are excluded for Gratuity calculations
Whether Bonus, Incentives are considered as wages for the calculation of Gratuity.
No.As per the Gratuity act, the definition does not include bonus,Incentive,commissions,night shifts allowance,travel allowance are not considered as wages or Salary for the calculation of Gratuity .
Whether calculation of Gratuity on the basis of rate of wages or actual wages drawn on last month .
Calculation of gratuity will be on the basis of rate of wages drawn on last month.
In case of death or disablement the condition of qualifying periods of 5 years is applicable
No. In case of death or disablement the condition of qualifying periods of 5 years is not applicable.
Is employer liable to pay interest due to delay payment of Gratuity ?
Yes, Employer will pay at the rate of 10 % of interest due to delay payment of gratuity.
What are the consequence of non payment of Gratuity ?
- Imprisonment of 3 months which may extends to 1 Year
- Fine of Rs 10,000 which may extend to Rs. 20,000
When gratuity is forfeited
When an employee is caught under theft case, fraud, riotous, any act of violence, any offence relating to moral turpitude.
Can gratuity forfeit without issuing Show cause notice.
No, Gratuity can not be forfeited without issuing show cause notice & without holding disciplinary action.
What is extra clause as per the new provision of Gratuity
- On the expiry of fixed term contract
- On any happening of any event as notified by the central Government
Which extra allowance is added as per the new provisions of the definition of wages?
Retaining Allowances
How to determine gratuity for Fixed term employment
Gratuity= Last drawn salary at the time of exit*(15/26)* Pro rated fraction on completed years of service at the time of expiration of term of employment.
