FAQ’s on Gratuity

1. What is Gratuity?

Gratuity is sum of money paid by the employer to employee for the services rendered during the period of employment.

2. Who is eligible to receive gratuity?

Following are the eligibility criteria for an individual to receive gratuity:

  1. The individual should be eligible for superannuation or
  2. The individual should have retired from service or
  3. The individual has resigned from employment after serving 5 years in the organization or In case of death

3. What are the factors involved in computing gratuity?

Gratuity payable depends on the following two factors

     Last drawn salary

     Number of years of service

4. How to compute gratuity for employees covered under Payment of Gratuity Act, 1972 (Gratuity Act)?

Formula to compute gratuity for employees covered under Gratuity Act is 15 days of last drawn salary for each completed year of service or part of thereof in excess of six months.

15 last drawn salary X number of years of service

26

5. How to compute gratuity for employees not covered under the Gratuity Act?

15 last drawn salary X number of years of service

30

6. What is meant by Salary for the purposes of gratuity computation?

Salary includes basic pay, dearness allowance and commission received on sales

7. What are the tax implications in the hands of employees on receipt of gratuity?

  

a. Government employee – The amount of gratuity is fully tax exempt in the hands of the employee

  

b. Employee covered under the Gratuity Act – 15 days salary as per the last drawn salary of individual

c.   Employee not covered under the Gratuity Act – Least of the following is exempt from tax

  • INR 20,00,000
  • Amount actually received
  • Half month’s salary for every year of service that the employee has completed with the employer
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