Gratuity is an important aspect of employee benefits that recognizes an employee’s long-term service and dedication to their organization. It is a monetary reward given by employers to employees as a token of appreciation for their service. In this article, we will study the details of gratuity rules including eligibility criteria, calculation methods, forfeiture conditions, income tax implications and required forms.
Eligibility for Gratuity
To be eligible for gratuity, an employee must meet certain criteria. As per the Payment of Gratuity Act, 1972, the following conditions must be fulfilled:
Completed Five Years: An employee must have completed at least five years of continuous service in the organization. However, this condition is relaxed in case of death or disability of the employee.
Incorporated Establishments: The Act covers establishments employing ten or more persons during the preceding twelve months.
Types of Employment: Permanent and contractual employees are eligible for gratuity.
Gratuity calculation
The calculation of gratuity is based on two factors: the last drawn salary of the employee and the number of years of service. The formula for calculating gratuity is as follows:
Gratuity = (last drawn pay x 15/26) x number of years of service
Here, last pay refers to basic pay plus dearness allowance and includes any commission received if it is part of regular pay.
Forfeiture of gratuity
In certain cases, the gratuity amount may be forfeited. According to the Payment of Gratuity Act, an employer can withhold gratuity if an employee is dismissed for any of the following reasons:
- Any act of misconduct or disorderly conduct which damages the property of the institution.
- Engaging in an act of workplace violence or moral turpitude.
- Committing an offense involving moral turpitude while on duty.
However, it is important to note that the employer can only confiscate the gratuity amount that is caused by the loss.
Income tax implications
Gratuity is subject to Income Tax rules. The tax treatment it varies depending on the type of employee and the rules laid down by the Income Tax Department. As per the current rules, the following exemptions are applicable:
- For Government Employees: The entire amount of gratuity received is exempt from income tax.
- For Non-Government Employees: At least three of the following are exempt:
- 20 lakhs Rs
- Actual gratuity received
- 15 days pay for every completed year of service (as per formula mentioned earlier)
Forms for Gratuity
To claim, specific forms need to be filled and submitted. Commonly used forms include:
- Form I: This form is used by employees to nominate a beneficiary to receive gratuity in case of death of the employee.
- Form F: This form is used by the employer to give instructions to open an account for deposit of gratuity.
- Form N: Employees can use this form to lodge a complaint regarding non-payment of gratuity or any dispute related to gratuity.
Conclusion
Gratuity serves as a valuable benefit to employees, acknowledging their loyalty and commitment to their organization. It is important for both employers and employees to understand the eligibility criteria, calculation methods, forfeiture conditions, income tax implications and necessary forms associated with gratuity. By following gratuity rules and regulations, organizations can promote a positive work environment while employees can secure the benefits they are entitled to.
