Why Gratuity is an important factor for financial planning of employees?

Gratuity is given by the employer to an employee for the services rendered by him. It is usually paid at the time of retirement but it can be paid before provided certain conditions are met. 

As per Sec 10 (10) of the Income Tax Act, gratuity is paid when an employee completes 5 by him. It is usually paid at the time of retirement but it can be paid before provided certain conditions are met.
 or more years of full-time service with the employer(minimum 240 days a year). However, it can be paid before the completion of five years at the death of an employee or if he has become disabled due to accident or disease

Gratuity is a statutory benefit – employers are required to pay a lump sum benefit to their employees who have served for at least five years. The lumpsum is generally calculated as 15 days of eligible salary for each year of service.

Unlike certain other benefits like salaries, bonuses and life insurance, an employee receives gratuity only at the exit from the company and not while in service.

So, let’s walk through the multiple advantages of getting registered under this scheme and know how it is the best benefit programmed ever:

Straight forward Eligibility

Any working professional is eligible to claim the gratuity amount at the time of termination if he/ she has completed working for a minimum of 5 years with the same organization. Now, the people registered under the gratuity scheme can also nominate another person or name their legal heir in order to claim the reward money in case of death, disability or prolonged illness of the recipient, when the employment is automatically discontinued.

Common Applicability

According to the Payment of Gratuity Act, 1972, companies that have an employee base of 10 working members or more are liable to get registered under the Gratuity benefit scheme. These establishments may include railway companies, shops, factories, mines, oilfields, ports, plantations among other.

Simple Calculation

There is always an easy way out to solve a problem. Same is the case with calculating your salary or the earnings and deductions separately. Although we have an option of Gratuity calculator to do the math, what is the point if you don’t know the basics, right? So, the Gratuity calculation formula to follow is:

Gratuity = Last Drawn Salary (Basic Pay + D.A.) * 15/26 * Total Years of Service

The Tax Exemption Factor

The maximum limit that Gratuity amount can reach is INR 20,00,000 and any employee receiving up to this range can enjoy tax-free gratuity if they choose to withdraw it after the termination of employment due to what-so-ever reasons as per the Income Tax Act. In case the gratuity amount is withdrawn during the term of employment, it is counted as ‘salary’ and is thus taxable. Besides, the rule varies on the basis of various factors like type of organization/ employment and other factors.

Miscellaneous Advantages

Apart from the aforementioned obvious benefits, Gratuity scheme has a number of other advantages such as:

a. The assurance of a company to pay Gratuity doesn’t depend on the profit and loss of the company, it becomes compulsory once committed

b. One can transfer the gratuity fund and carry it forward to the next organization, but only if one has completed 5 years working with the same organization.