The role of gratuity in retirement benefits for Indian workers
Gratuity is a financial benefit given by an employer to employees as a form of gratitude for the services rendered. It's a significant part of the retirement benefits in India, governed by the Payment of Gratuity Act, 1972. This article aims to demystify gratuity and how it impacts Indian employees, ensuring you're well-informed about this essential component of your employment benefits.
Eligibility criteria explained
To be eligible for gratuity, an employee must have been in continuous service for at least five years with a single employer. This rule applies to all types of organizations, whether they are in the private sector or public sector, except when an employee passes away or is disabled due to illness or accident. In such cases, the five-year rule does not apply.
Calculating your gratuity amount
The gratuity amount is calculated based on the employee's last drawn salary and the total years of service. The formula for this calculation is, (last drawn basic salary + dearness allowance) x 15/26 x number of years worked. In this formula, 15/26 signifies 15 days out of the 26 working days in a month, highlighting how each year's service contributes to the gratuity.
Tax implications on gratuity
Government employees enjoy full income tax exemption on gratuity. For non-government employees, gratuity is exempt up to ₹20 lakhs upon retirement, superannuation, or if received by nominees after death. Amounts exceeding ₹20 lakhs are taxable under the applicable income tax slabs. This ensures a significant part of their retirement benefit is protected from taxes, providing financial security.
When can you claim gratuity?
Gratuity can be claimed either at retirement or at resignation after completing five years with an employer. In case of death or disability, gratuity must be claimed by the nominee or legal heir, respectively, without any minimum service period requirement. The process involves filling out Form I and submitting it to your employer, who will then process your gratuity payment.
Tips for maximizing your gratuity benefit
One way to maximize your gratuity benefit is by negotiating a higher basic salary during your employment. This is because gratuity calculation primarily depends on your last drawn basic salary plus dearness allowance. Another strategy could involve planning your exit close to completing anniversaries at work. This can round off another year towards calculating total service years, potentially increasing your gratuity payout.
