Do you know that gratuity is a monetary benefit that a company provides to its employees? Yes, you heard right, apart from the salary, pension and provident fund, an employee working for a long time in a company is also eligible to get gratuity benefits. This is the reward of employees which they deserve after showing their hard work & devotion towards the company. But there are eligibility criteria that employees need to fulfil before getting this complimentary service.
Gratuity In Salary?
Under Payment of Gratuity Act 1972, it is a monetary benefit for which an employee becomes eligible when they serve for a long time. Under this act, an organisation grants this benefit to their employees only as a token of appreciation. An employee invests his prime years in the company to earn this benefit amount. This amount helps an employee to boost his savings & to plan his or her retirement.
Tax Free Benefit
Payment of Gratuity Act 1972 states that this benefit is available for every employee of a company who has more than 10 working individuals. If the employee has become eligible to get this monetary benefit, then he will be paid by the company. It doesn’t matter if he retires, changes his job or resigns. The amount of tax free gratuity also increases from Rs.10 lakhs to Rs.20 lakhs.
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There is a simple and effective formula that employers use to calculate this amount for their employees.
Gratuity Amount = Y x S x 15/26
In this formula, Y denotes the number of years the employee is working in the company. S represents the last drawn salary including DA.
To explain it further let’s take an example:
- If the value of Y is 10, it means the employee worked for the last years in the company.
- If Value of S is Rs.2000, it means the last drawn salary with DA is twenty thousand.
- Then the final amount will be: “Gratuity Amount = 10 x 20000 x 15/26 = INR 1,15,385”
Note that a minimum of 5 years of service is mandatory to be eligible for a gratuity amount.