Retirement Plannig Step1: Know your Gratuity

Gratuity is lumpsum payment given to any employee when he reitires or leaves service, it is primarily meant to be a retirement benefit to an employee under the provision of the payment of gratuity act 1972, minimum eligibility to get gratuity is atleast 5 years of continuous service with one employer.

 

As per its common and popular meaning gratuity means

1. money given in recoginition of services
2. an extra amount money given for services rendered
3. an award in lieu of long service given without claim or obligation

Payment of Gratuity as per Act

• Minimum employees to be 10 and above, once the organisation is covered under the act even the number of employees goes down below 10 is subsequent years the organisation is remains covered under the gratuity act.
• Minimum 5 years of service with one employer
• The employee leaves the organisation due to death or incapacitation the minimum service criteria is not applicable
• The eligible employee gets gratuity either on retirement or on leaving organisation
• The nominee has to be necessarily one or more member of the family only, in case others the nominee will become null and void
• An employee can't assign the gratuity amount in favour of anyone as security for repayment of loan or otherwise.
• Maximum gratuity payable as per the act is Rs.3,50,000/-

Grautity Formula

               (15/26)* No of completed years of service * Last salary drawn

where

Last salary drawn = Last month Basic Salary + Dearness allowance

Taxation of Gratuity

1. Actual Gratuity Received
2. Maximum Grautity payable as per act Rs.3,00,000/-
3. Calculation of Gratuity by above said formula

The minimum  of the above amount will be exempted from income tax as per section 10(10) of income tax act.