The amount of gratuity is given to any employee when he retires or changes his job after working for five years because after five consecutive years the employee becomes entitled to the amount of gratuity. The amount of gratuity is given by the company as a reward to the employee for continuously giving his better services in the company for a long time.
The amount of gratuity is decided under a formula. However, if the company wants, it can also give more than the fixed amount. After working for a long time, the employees get a substantial amount as gratuity, which is helpful in their needs. But is the amount of gratuity taxable or is it exempt from tax? Not many people know about this. Let us tell you-
Tax rules on Gratuity
According to the prescribed formula for Gratuity, whatever amount is made by you, it is tax free. Whatever amount will be in addition to that, tax is levied on it. According to the rules, tax exemption cannot be given on the amount of gratuity exceeding Rs 20 lakh. Even if she sits more according to the formula.
What is the formula of Gratuity
There is a formula to calculate gratuity – (last salary) x (number of years worked in the company) x (15/26). Last salary means the average of your last 10 months salary. Basic salary, dearness allowance and commission are included in this salary. Due to 4 days of Sunday in a month, 26 days are counted and gratuity is calculated on the basis of 15 days.
Gratuity rules
- If 10 or more people work in a private or government company, then that company should give the benefit of gratuity to all the employees. Apart from the company, shops, mines and factories come under this rule. But any employee becomes entitled to gratuity only after working in that company for 5 consecutive years. If the job is of 10 or 20 years, then a good amount of gratuity is available, so that the person can fulfill all his responsibilities.
- It has not been a full five years for a person working in the company, but even if the employee has worked in the company for 4 years and 8 months, his service is considered to be for full 5 years. In this case, he gets the amount of gratuity according to 5 years. However, gratuity is not available in less than 4 years and 8 months.
- If an employee dies during the job, then the entire amount deposited in his gratuity account is given to his nominee. In such a case the condition of minimum 5 years of service is not applicable.
- When the company or organization is not registered under the Gratuity Act, the employees are not covered under the Gratuity Act. In this case, it is the discretion of the company whether to give gratuity or not. But if the company still wants to give gratuity to an employee, then its formula is different. In this case, the amount of Gratuity will be equal to half a month’s salary for every year. But the number of working days in a month will be considered as 30 days, not 26.
