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As per amendment in the Income Tax Rules, PAN or Aadhaar are to be mandatorily quoted for cash deposit or withdrawal aggregating to Rupees twenty lakhs or more in a FY. Please update your PAN or Aadhaar. Kindly reach out to the Bank’s contact center on 1800 10 888 or visit the nearest IDFC FIRST Bank branch for further queries.
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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 is a monetary reward given by employers to employees as a token of appreciation for their long-term service. Governed by the Payment of Gratuity Act, 1972, gratuity is a legal obligation for employers in India.
In simple words, gratuity represents a financial thank-you for an employee's dedication and loyalty. Employers typically pay gratuity either directly from their funds or through a gratuity insurance plan. In the latter case, an insurance company disburses the payment when the employee qualifies. To be eligible for gratuity, an employee must complete at least five years of continuous service with the same employer. This benefit is also provided in cases of retirement, resignation after the stipulated period, or unfortunate events like the employee's death or disability.
When an employee joins a company, they are automatically enrolled in the organisation’s gratuity scheme. At the time of their exit, whether due to resignation, retirement, or unfortunate circumstances like death or disability, the gratuity process begins automatically. Employers may either fund gratuity directly from their reserves or manage it through a specialised insurance provider.
The employee or nominee (in case of death) typically submits a formal claim or application. The employer then calculates the amount and communicates the lump-sum payment to the employee.
Keep in mind that if the employee leaves before meeting the eligibility criteria, they forfeit the gratuity.
Gratuity acts as more than just critical financial support. Its primary purposes include:
Gratuity benefits employees in multiple ways:
· Continuous service: Completion of at least five years with the same employer.
· Retirement or superannuation: Eligibility upon retirement or superannuation.
· Resignation: Leaving the organisation after fulfilling the five-year requirement.
· Death or disability: Payment to the employee’s nominee if they pass away or suffer a disability.
The Payment of Gratuity Act, 1972, governs gratuity payments in India. The act aims to provide financial security to employees who dedicate several years to one organisation.
Key highlights of the act include:
Understanding the act helps employees know their rights, and employers meet their obligations responsibly.
Gratuity is entirely funded by the employer without any periodic contribution from the employee, unlike schemes such as PF or NPS.
Gratuity calculations depend on your last drawn salary and years of service. The formula differs slightly based on whether your employer falls under the Gratuity Act. Let’s look at both scenarios carefully:
If your organisation falls under the Gratuity Act, use this formula:
Gratuity = (15 x last drawn salary x years of service) ÷ 26
Where:
For example, if your last drawn salary is ₹50,000, and you have worked for 10 years, the gratuity would be:
(50,000 × 15 × 10) ÷ 26 = ₹2,88,461.54 (around 2.8 lakh)
The formula used here is:
Gratuity = (15 x last drawn salary x years of service) ÷ 30
In this formula:
So, for a last drawn salary of ₹50,000 and 10 years of service, gratuity would be:
(15 × 50,000 x 10) ÷ 30 = ₹2,50,000
Thus, gratuity is slightly lower in this scenario.
In case an employee passes away during service, gratuity depends on the years served but follows a fixed slab structure:
Length of service |
Gratuity amount (as multiples of monthly salary) |
Less than 1 year |
2 × salary |
1 year or more but less than 5 years |
6 × salary |
5 years or more but less than 20 years |
12 × salary |
20 years or more |
Half of the emoluments for each completed six-month period, subject to a maximum of 33 times the emoluments. |
The family or nominee receives this amount directly.
Let’s understand how taxation works on gratuity:
Gratuity received by employees may attract income tax depending on the category of employment and the amount received.
Government employees: Tax exemption on gratuity is now up to ₹25 lakh (Before January 1, 2024, it was ₹20 lakh).
Private-sector employees covered under the act: Exemption depends on the least of:
· Eligible gratuity (as per the formula above)
Private-sector employees not covered under the act: Exemption depends on the least of:
The remaining amount, if any, is taxed under “Income from Salaries” according to the applicable slab rate.
As discussed earlier, for central government employees, the maximum gratuity exemption limit is ₹25 lakh. For private sector employees, the maximum tax-free gratuity limit remains ₹20 lakh. Any amount above this is considered ex-gratia, which is voluntary and not legally enforced.
To simplify gratuity and financial planning, you can also use a gratuity calculator online. Just input the following basic details, and the calculator does the math:
After inputting all these details, the calculator shows an estimated gratuity amount and reveals what you can anticipate from your employer.
In India, gratuity on salary becomes payable when an employee ends their 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 gets 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 getting the evidence, the employer acknowledges the claim.
Gratuity in salary is a significant component of an employee's compensation structure. It is a testament to an employee's dedication and years of service. It signifies the employer's acknowledgement 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, proactive financial planning with reliable salary accounts [KM1] is also beneficial. With an IDFC FIRST Bank Corporate Salary Account, you can enjoy higher interest rates, monthly interest payouts to grow your wealth faster, and avail all common salary account services completely free of cost. These features greatly amplify your savings over time. In addition, you enjoy a higher daily transaction limit of ₹6 lakhs and cash withdrawal limit of ₹2 lakhs to effectively manage your expenses and enjoy exclusive access to 20+ OTT platforms and attractive discounts across 40 brands with Times Prime.
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.
The maximum gratuity amount exempt from tax is ₹25 lakh for government employees, ₹20 lakh for private-sector employees, if covered under Payment of Gratuity Act, 1972, and ₹10 lakh if not covered under the Gratuity Act. Employers may pay more than this limit, but any amount exceeding the exempt limit becomes taxable.
Since the employee remains on the payroll during the notice period, it counts towards the total length of continuous service for gratuity eligibility and calculation.
The contractor or service provider must pay gratuity to contract workers who have completed continuous service, as mandated by the Payment of Gratuity Act, 1972.
The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirstbank.com for latest updates.