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What is Gratuity in Salary?

A gratuity is a sum of money that an employer gives to a worker as payment for the work they have done for the company. However, only workers who have worked for the company for five years or longer are eligible for a gratuity. One of the superannuation perks that employees might receive from their employers is the gratuity amount. Even though it’s a retirement benefit, you can start using it prior to reaching old age. This article will assist you in understanding what a gratuity is, how much it is worth, and when it is given.

What Does a Salary Gratuity Mean? 

A gratuity is money that an employer gives to a departing employee who has worked for the same company for at least five years. It might be viewed as a monetary “thank you” present from your employer for putting in a lot of effort and sticking with the business for five years in a row. It is considered a benefit plan intended to help an individual with retirement and is a portion of the employee’s pay.

The formula used to calculate gratuity amounts

Gratuity Formula: The elements that are used to determine the amount of gratuity are listed below. The sum also depends on how long you’ve worked for the organization and how much you were paid last time. 

formula used to calculate gratuity amounts

Gratuity is equal to N*B*15/26, where 

N:- is the number of years of service in the company and

B:- is the base salary plus benefits. 

15/26: what is it? 

The number 26 denotes the number of working days in a month (excluding Sundays), and 15 denotes a half-month compensation of 15 days. 

What Does “Gift” Mean in a Salary? 

A gratuity is a monetary gift given to staff members who have worked for a company for at least five years as a show of appreciation. The Payment of Gratuity Act of 1972 governs all payments, and employers have the option to pay it out of their own funds or choose to use a gratuity insurance provider.

Also Read:- How to Claim Medical Allowance | How to Calculate Income Tax For Salaried Persons

Determining the Gratuity for Workers Not Covered by the Gratuity Act 

The organization may nonetheless give gratuities even if it is not covered by the Act. However, the amount of gratuity is determined by taking the half-month income of the employee and applying it to each completed year. The pay consists of a base wage, a dearness allowance, and a commission depending on sales. For workers who are not protected by the Gratuity Act, the following formula is taken into consideration while determining the gratuity amount: The gratuity amount is equal to (15 * the last pay drawn * the length of service) / 30. As an illustration: For instance, if your income is Rs. 50,000 and you have worked for a company for ten years and eight months, the gratuity amount is determined as follows:

Calculation of Gratuity in Case of Death of an Employee

Tenure of ServiceThe Amount Payable Towards Gratuity
Less than a year2 * basis salary
1 year or more but less than 5 years6 * basic salary
5 years or more but less than 11 years12 * basic salary
11 years or more but less than 20 years20 * basic salary
20 years or moreHalf of the basic salary for each completed six-monthly period. However, it is subject to a maximum of 33 times of the basic salary.

Tax on Tip:-  

The employee who receives the tip amount determines how the gratuity is taxed. The tax on gratuities can be calculated in two common scenarios: 

  • Government Employee Receiving Gratuity Amount: Gratuities are completely excluded from income tax if they are received by any employee of the state, federal, or local governments. 
  • Any Other Salaried Person Entitled to Gratuity Money from an Employer Protected by the Gratuity Payment Act: The following sum is free from tax when given as a gratuity to any employee whose employer is protected by the Gratuity Act.
  • Fifteen days’ pay based on the individual’s most recent salary draw 
  • Any Other Salaried Person Who Gets a Gratuity Amount from an Employer Not Listed Under the Gratuity Payment Act: The lowest of the following three amounts is free from taxes in this situation. 
  • The employee actually received Rs. 20 lakh in gratuity. 
  • The amount of gratuity that can be received.

Also Read:- What is Gross Salary | What is PF in Salary | Tax Benefit To Employee On Medical Reimbursement

Tax Breaks for Gratuities 

Here are the policy changes implemented during the 2016 budget that affect gratuity laws: 

  • Except for statutory corporations, gratuities received by government personnel are completely exempt from tax under Article 10(10) of the Income Tax Act. 
  • The Income Tax Act’s Article 10(10) ii states that the minimum sum of the following is free from taxation when it comes to death and retirement gratuities received by employees covered by the Gratuity Act of 1972.
  • (*15/26) X Last salary drawn** X Year of service completed, or portion thereof, exceeding six months. 
  • Twenty lakh rupees. 
  • The amount of the gratuity that was really earned.

Revocation of Gratuity 

According to the Payment of Gratuity Act of 1972, even after an employee has worked for five or more years, an employer may choose to withhold all or part of the employee’s gratuity payment. This only works in cases when the worker was fired due to disruptive behavior, which includes making attempts to harm other people physically while at work.

Summing it

A gratuity is simply a retirement benefit that an employee receives from their employer after years of service. Nevertheless, the gratuity sum may also be collected upon leaving the company following a five-year tenure, in the event of the employee’s disability or death. As a result, depending on the organization, different taxation standards and computation processes apply to gratuities.

FAQs on Gratuity in Salary

1. What is Forfeiture of Gratuities? 

Your employer may lose all or a portion of the gratuity as per the Gratuity Payment Act. These forfeitures, however, only apply if your employment is terminated due to disruptive behavior that causes harm to a coworker. 

2. When and How is The Gratuity Paid Out? 

You must complete an application and send it to your employer in order to claim the amount of your gratuity. Your company will then evaluate it and determine how much to tip you. The money will be paid out in 30 days after the company notifies the body responsible for paying gratuities. Additionally, you’ll get appreciation when your gratuity is given to you.

3. How Much Time Does it Take for the Employer to Give the Cash for the Gratuity? 

An employee who is eligible for the gratuity may submit an application within 30 days of the day it becomes payable. 

4. What Does The Gratuity Calculation Indicate as 15/26? 

The formula included in the Gratuity Calculator is referred to as 15/26 in the context of gratuity calculations. The computation of gratuity is based on the assumption that a month consists of 26 working days, with pay being calculated at a rate of 15 days. 

5. After Five Years, How Much Gratuity Will I Receive? 

The amount of the gratuity is dependent on when you were paid most recently. You can determine the amount of the gratuity by taking into account how long you have been with the company and how much you were paid when you last received your paycheck.

6. Is Form 16 Displaying Gratuity? 

Form 16 may or may not show a gratuity. Depending on whether the employer adds information on gratuities to the Form 16 that is given to workers. 

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