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If you have been working with an organisation for quite some time, you are sure to have heard the word gratuity. But do you know what is gratuity and how is it calculated?
Whether you are an employee curious to know more about your benefits or an employer trying to ensure compliance, understanding gratuity is absolutely essential. In this guide, we shall understand what is gratuity amount, who is eligible and break down the calculation of gratuity amount, in a clear practical and way.
You may notice that the word ‘gratuity’ appears to be related to ‘gratitude’, meaning being thankful or showing appreciation. That’s exactly what gratuity implies. Gratuity is a reward, generally a financial benefit, paid by the employers to their employees as a gesture of appreciation and gratitude for their long-term service to the organisation. It is regulated by the Payment of Gratuity Act, 1972 which mandates that an employee who is eligible for gratuity receives a lump sum amount when he/she leaves the organisation.
Here, the service period has some odd months leading to an incomplete year with five complete years. How to calculate gratuity amount in this case?
Consider the odd year of 8 months. As 8 months are more than 6 months, we round the service period of 5 years and 8 months to 6 years, and calculate the gratuity using the same formula.
A. Gratuity is fully tax-exempted for government employees
B. Gratuity is tax-free up to ₹20 Lakhs for employees in private sector. The amount that exceeds this is taxable under section 10 (10) of income tax act.
Now that you have an understanding of what is gratuity and how is it calculated, let’s have a look at some compliances related to this. Gratuity in India is regulated by the Payment of Gratuity Act, 1972, which clearly outlines the rules and obligations for employers.
Understanding what is gratuity and how is it calculated is important for both employees and employers. So, ensuring error free calculation of gratuity amount and compliance with the rules protect employee rights and keep organisations legally secure.
At Vishaal Consultancy Services, we offer labour law advisory and 360° statutory compliance solutions to help businesses manage their gratuity related obligations with utmost ease. With 30+ years of experience with over 250 clients across various domains, we are proud to have a flawless, 100% track record with compliances. Whether you are looking for assistance with the eligibility for gratuity calculation, or entire payroll management, our expert team ensures precision, accuracy, peace of mind.
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