Gratuity amount is calculated on the basic salary drawn on the last month of his service. It is paid to the hands of a retiring employee at the time of his retirement or to his legal heir in the event of his death.
Eligibility to receive gratuity:
As per the provisions of Section 10 (10) of Indian Income Tax Act, gratuity is payable to an employee when he has completed 5 years or more full time service with his employer with a minimum presence of 240 days in each year and eligibility as a condition of his service.
Gratuity Paid to a government servant:
It is calculated @ 25% of a month’s Basic salary with D. A drawn immediately before the period of his retirement for each six completed monthly period of his qualifying service. Amount of Gratuity a government employee can receive has no minimum limit. The retirement gratuity payable in 16.50 times multiple of the Basic Pay, with a maximum of Rs.
Death Gratuity is a single payment benefit amount paid to the dependent of a deceased government servant in certain cases. No minimum period of service is required here. The calculation death gratuity is done as follows:
|Service Qualifying For Gratuity||Rate|
|If the Service is less than one year||200% of basic pay|
|If service is > 1 yr but < 5yr||600 % of basic pay|
|Service > or =5 years < 20 years||1200% of basic pay|
|20 years or more||Subject to a maximum of 33 times of total pay or Half of total pay for each completed ½ yearly period of qualifying service|
Maximum amount of Death Gratuity admissible is Rs. 10 lakhs with effect from. 1.1.2006
When the qualifying service is below 10 years the government employee will receive service gratuity which is half of monthly basic pay last drawn for every completed ½ yearly period of qualifying service in addition to over and above the retirement gratuity.
If gratuity is received from more than one employer or the employee served more than two employers during any previous year, maximum applicable exemption will remain Rs 350,000 and will be proportionately adjusted. If any employee, employed in a seasonal establishment (not throughout the year), the gratuity exemption shall be for seven days wages for each season.
For calculation of tax exempt on gratuity, all employees have been classified in 3 groups:
(A) Government employees;
(B) Non government employees outside the scope of Payment of Gratuity Act, 1972;
(C) Non government employees covered within the Payment of Gratuity Act, 1972.
Government employees (in A) are fully exempted from any tax on gratuity.
In case of employees under (C) above, the maximum exemption from tax is least of the 3 below:
(i) Actual amount received as Gratuity;
(ii) Rs Three Lakhs Fifty Thousand;
(iii) 15 days’ salary for every completed year (six month or service through the year whichever is more) of service or part thereof.
In case of employees (in B) the (iii) clause applicable for (C groups) will be changed as half month’s average salary for each completed year of service or no part thereof.
Gratuity Percentage in India
Formula for calculating gratuity:
Last Drawn Basic x 15/26 x Completed Year Service
It is worked out at 4.1 percentages for calculating CTC.