Gratuity is an essential employee benefit that provides financial assistance to employees upon their retirement or resignation. Employers must offer a gratuity to their employees who complete a minimum of five years of service with the organization.
Gratuity helps employees secure their retirement savings and ensures financial stability post-retirement. In this guide, we’ll discuss the basics of calculating gratuity in India with the help of a gratuity calculator.
What is gratuity?
Gratuity is a lump sum amount that an employer offers to an employee as a token of gratitude for their dedicated service to the organization. The amount of gratuity depends on the number of years of service and the last drawn salary of the employee. According to the Payment of Gratuity Act, of 1972, an employee is eligible to receive gratuity upon completion of five years of service with the same employer.
How is gratuity calculated?
The gratuity amount is calculated using the following formula:
Gratuity = (Basic Salary + Dearness Allowance) x 15 x (Number of years of service / 26)
Here, the basic salary is the fixed amount paid to the employee, excluding any bonuses, allowances, or overtime payments. Dearness allowance (DA) is the component of the salary that is paid to compensate for the cost of living. The number 15 represents the number of working days in a month, while 26 represents the number of working days in a year.
To explain the calculation of gratuity, let’s consider an example:
Suppose Mr. Sharma has completed 20 years of service with a manufacturing company. His basic salary is INR 50,000, and his DA is INR 10,000. We can calculate his gratuity amount as follows:
Gratuity = (50,000 + 10,000) x 15 x (20 / 26)
= INR 5,76,923.08
Therefore, Mr. Sharma is eligible to receive a gratuity amount of INR 5,76,923.08 from his employer upon his retirement or resignation.
CKYC means gratuity calculation
The Central KYC (CKYC) Registry is a centralized Know Your Customer (KYC) repository that helps financial institutions secure the identity of their customers and prevent fraudulent activities. CKYC is a unique identification number that is generated by the CKYC registry after verifying the identity of the customer and collecting their KYC documents.
For the calculation of gratuity, the employer must verify the identity of the employee using CKYC. The employer must collect the employee’s KYC documents and register them in the CKYC registry. The employer must also link the employee’s CKYC number with their gratuity account for seamless and secure transactions.
What are the tax implications of gratuity?
Gratuity is taxable under the head “Income from Salary” in the income tax return of the employee. However, there is a tax exemption limit for gratuity based on the employee’s years of service and the amount of gratuity received.
For government employees, the entire amount of gratuity received is exempt from tax.
For non-government employees, the tax exemption limit for gratuity is calculated as follows:
For employees covered under the Payment of Gratuity Act, 1972, the exemption limit is 15 days’ salary (for every completed year of service).
For employees not covered under the Payment of Gratuity Act, 1972, the exemption limit is the lowest of the following:Half a month’s average salary for every completed year of service
Actual gratuity received
INR 20 lakhs
Any amount received as gratuity above the exemption limit is taxable as per the employee’s income tax slab.
Conclusion:
Gratuity is an important employee benefit that helps employees secure their retirement savings and ensures financial stability post-retirement. The calculation of gratuity is based on the employee’s basic salary, dear allowance, and the number of years of service.
CKYC is a unique identification number that is generated by the CKYC registry after verifying the identity of the customer and collecting their KYC documents. Tax implications of gratuity include tax exemption limits based on the employee’s years of service and the amount of gratuity received.
It is advisable to consult a financial expert before investing in any financial instrument. The investor must gauge all the pros and cons of trading in the Indian financial market before making any investment decisions.