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Gratuity Act, Amendment, Eligibility, Abstract, and Benefits

A gratuity is an amount received by an employee from his employer after serving 5 years or more under the same employment. After the employee seizes to be employed, he/she can apply for gratuity within 30 days from the payable date. 

In case the employee has served more than 5 years and 6 months, it will be considered as a complete year, for example if he/she has served for 14 years and 8 months, the gratuity will be calculated for 15 years. 

You can use the gratuity formula to calculate your earnings. This formula has been discussed below.

Formula –

The formula is divided into two parts, such as:

Employees covered under the Gratuity Act

Formula – (15 X monthly wage X working tenor) / 26

For Example-

  • A working tenor of 9 years two months
  • A monthly salary of Rs. 20,000

As per gratuity formula, the amount you will receive at the end of your employment will be (15 X 20,000 X 9)/26 = Rs. 1.04 Lakh (approximately). 

Employees not covered under the Gratuity Act

Formula – (15 X monthly wage X working tenor) /30

For Example –

  • A working tenor of 11 years eight months
  • A monthly salary of Rs. 70,000

As per gratuity formula, the amount at the end of your employment will be (15 X 70,000 X 12)/30 = Rs. 4.2 Lakh. 

With this substantial amount, you can invest in various schemes to induce better returns and to manage your money more effectively. 

Gratuity Act

The gratuity you receive is paid under the Payment of Gratuity Act of 1972. This act covers every individual employed in factories, plantations, ports, mines, oil fields or any other organisations with more than 10 employees. This act states that the contributions towards the gratuity of an employee should be made by an employer and not an employee. 

However, if an employer chooses to invest in the best investment options in India for gratuity such as insurance schemes, an employee too can make his/her contribution in to the same if desired. 

Eligibility

To be able to enjoy gratuity, an employee has to meet the eligibility criteria as follows. An employee should – 

  • Have completed 5 years of service. 
  • Not have been terminated or asked to discontinue his services under any grounds of misconduct. 
  • Be eligible for superannuation.

In case of the demise of an employee or he/she suffers any illness or disability due to accidents, the gratuity amount will be paid to the legal heirs or appointed nominee. 

Taxation

In the recent budget, the Government has raised the tax-free limit of gratuity to Rs. 30 Lakh from Rs. 20 Lakh to benefit employees. You can now use your money to invest in various savings or investment schemes to save money and make money at once. 

The taxation is divided into three categories, such as:

  • For government employees (central, state or local) the gratuity amount is exempted from tax. 
  • Other than Government employees, any employee who is covered under the Gratuity Act, the amount he will receive for the last 15 days of his service will be deducted as tax. 
  • For employees not covered under the Gratuity Act, Rs. 10 Lakh or the actual amount of gratuity received or the salary of each half month for each year will be deducted (whichever is lower) as tax. 

Features and benefits

  1. You can conveniently use the gratuity formula to estimate the amount you shall receive at the end of your service as gratuity. 
  2. An employer can refuse to pay gratuity only if the employee has been terminated or asked to resign under any grounds of misconduct. 
  3. The gratuity amount can be invested in various schemes to plan finances for early retirement. 
  4. An employee can apply for his/her gratuity within 30 days from its payable date. 

You can invest your gratuity amount in the best investment options in India to yield substantial returns. These investments options may include life insurance, real estate investment, equity debt funds, etc. 

Alternatively, you can also invest in fixed deposit. Companies like Bajaj Finance offer a competitive interest rate of 8.70% with a flexible tenor of 12 to 60 months on their FDs. 

In addition to the above, in case an employer fails to pay gratuity to an employee, the former will be subjected to legal actions and can be punished. The imprisonment term in such cases shall not be less than 6 months, which can be extended to a term of 2 years.

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Gaurav Khanna is an experienced financial advisor, digital marketer, and writer who is well known for his ability to predict market trends. Check out his blog at HighlightStory