What is Gratuity in a salary?

Loyalty is rarely unrewarded. If you stay invested long-term, many investment instruments can earn returns and help you build a wealth corpus. Similarly, if you stay with one employer for years, the employer may provide several benefits as a token of appreciation. If you are awarded monetary benefits, it is called gratuity.

Although gratuity is a familiar term, some confusion still exists. For example, many wonder if employers are required to pay gratuity or if it is optional. Does the employer pay gratuity out of their own pocket, or is there an employee contribution? Let us find out.

Gratuity meaning
 

So, what is gratuity in a salary? Gratuity is defined as "an amount of money given as a reward for service." It is a way companies reward their employees for a long-term association with them. Gratuity comes under the Payment of Gratuity Act, 1972, so it is backed by the law.

Generally, employers pay gratuity in two ways. They either give it out of their pocket to employees who deserve it legally or take gratuity insurance. In the latter, the insurance company pays the employees when they become eligible.

Gratuity functions as a token of appreciation for employee dedication and loyalty. Moreover, employers who adhere to this act demonstrate commitment and respect for their staff. It showcases the value placed on long-term service and dedication.

Now that you know what gratuity in a salary and its importance is, let’s see how it works.

How does gratuity work?

When an employee joins an organisation in India, they immediately enter its gratuity scheme. This plays a vital role in financial planning later on. The offer letter usually highlights these benefits. The employer either adds funds directly to this scheme or collaborates with a life insurance company to do so. After an employee completes the stipulated years of service, he receives this gratuity sum as a gesture of appreciation. It's a one-time lump sum reflecting his valuable contribution. But there's a catch: if the employee resigns and departs before these designated years, they walk away without gratuity.

Eligibility to receive gratuity in salary
 

Certain conditions must be met to be eligible for gratuity. You must have completed at least five years of continuous service with the same employer. Furthermore, you should be eligible for superannuation to receive gratuity. A superannuation fund is a retirement fund program offered by the employer. The employer pays a percentage of your basic salary towards the same every month. Employee contribution is voluntary.

Finally, your nominee will receive a gratuity if you pass away, unfortunately, during your employment.

Is gratuity taxable?

"Is gratuity taxable?" is a common question many employees have. Gratuity received is considered part of your income and is taxed accordingly. For example, if your salary is ₹6 lakh per annum and your gratuity is ₹1.5 lakh, your income for that year will be considered 7.5 lakh. You will be taxed according to the income slab or tax bracket you fall into.

Government employees receive gratuities exempt from income tax. However, taxes apply when a nominee gets the death-cum-retirement gratuity after an employee's passing. Private company employees are exempt from income tax subject to limitations.

Calculating gratuity
 

Understanding the meaning of a gratuity is not enough. You must also know how to calculate it. The formula for calculating gratuity is as follows:

Gratuity amount = Y S 15/26

Where:
Y is the number of years worked in the same company
S is the last drawn salary, including all its components

For instance, suppose you have worked in a company for five years, and your last drawn salary is ₹50,000. After calculating gratuity, you should get:

Gratuity amount = Y S 15/26

= 5*50000*15/26

= ₹1.4 lakh

While companies can give employees a higher gratuity amount, it cannot exceed ₹10 lakh. If it exceeds this limit, it is considered ex-gratia, which means it is entirely voluntary and not imposed by law.

To simplify gratuity and financial planning, you can also use a gratuity calculator online. Just input the critical data, and the calculator does the math. Key inputs include: 

• Employment period - It's vital to record exact years and months of service for precise calculations.
• Monthly salary - Input your final salary. This figure typically combines basic pay and daily allowance (DA).
• Commission on sales - For those earning sales incentives, it's crucial to add this monthly sum.

After inputting all these details, the calculator presents an estimated gratuity amount, revealing what you can anticipate from your employer.

Gratuity rules
 

In India, gratuity on salary becomes payable when an employee ends his employment after continuous service of at least five years. This payment occurs upon superannuation, retirement, resignation, or due to an employee's death or disablement in an accident or disease. Notably, the five-year requirement does not apply in cases of death or disablement.

For situations involving death or disability from accidents or illness, the nominee or legal heir receives the payment. If this nominee stands as a minor, the assistant labour commissioner invests the money in a term deposit in a nationalised bank until the minor reaches adulthood.

Employees eligible for gratuity can apply within 30 days of its payability. If they know their retirement or superannuation date, they may apply even earlier. A delay in application doesn't invalidate the claim, provided there's a genuine reason for the delay. The employer has an obligation to disburse the gratuity amount within 30 days of its payability.

For claims made by a nominee or heir, the employer might seek evidence or a witness to confirm the identity of the claimant or the authenticity of the claim. Upon receiving the evidence, the employer acknowledges the claim.

Conclusion
 

Gratuity in salary is a significant component ofin an employee's compensation structure. It is a testament to an employee's dedication and years of service. It signifies the employer's acknowledgment of the value that long-term employees bring. This financial token appreciates years of hard work and fortifies the employee's financial future. 

Speaking of securing your future, just as a gratuity amount strengthens future savings, proactive financial planning with reliable savings accounts is also beneficial. With an IDFC FIRST BANK savings account, you can enjoy higher interest rates and significantly amplify your savings over time. Combined with unmatched convenience and the mobile banking app, it becomes the perfect financial companion. Its value-added features complement modern lifestyles and offer more than just a safe haven for your funds. 

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