(This post offers calculation of Gratuity in two different methods and also discusses tax liability on Gratuity received)
The tax-exempt gratuity limit had already been raised to Rs. 20 lakh for government employees effective from 1 January, 2016. The ‘Payment of Gratuity Amendment Act 2017’ is likely to be passed in this budget session (commencing from Jan 29, 2018) which will make formal (private and public) sector employees eligible for tax free gratuity limit of Rs.20 lakh at par with Central Government employees.
The below post discusses the impact of raise in increase of gratuity on bank employees as well as private and other public sector employees.
Q: Who is eligible for gratuity?
Ans.: As per gratuity act 1972, any establishment which has more than 10 employees/workers shall pay Gratuity to its employees/workers. On any single day in the preceding 12 months if the number of employees worked in the establishment is 10 or more then such establishment is covered under gratuity act and it shall continue to bind the employer even when number of employees fall below ten.
Q: What is exgratia payment?
Ans.: The establishment which are not covered under gratuity act normally pay exgratia payment to their employees out of goodwill. The exgratia is paid by the employer, even though there was no obligation or liability to pay it.
Q: When the gratuity is paid to an employee?
Ans.: Gratuity is paid to an employee on his/her superannuation/retirement from the service. The employees who have put in more than 5 years of continuous service (without interruption) in an organisation are also eligible for the payment of gratuity. However, interruption in service due to sickness, accident, layoff, strike or lockout of the unit, are not considered as interruption in service. Gratuity is also paid on the occasions of death of an employee/or disability of employee to work in the same organisation, due to accident or disease even though 5 years of service is not completed.
Q: In banks which type of Gratuity is paid?
There are two types of gratuity payment systems in India viz. Gratuity paid under the Payment of Gratuity Act, 1972 and another category is gratuity paid to others who are not covered under the Payment of Gratuity Act, 1972. In the banks (except SBI), Gratuity is paid to employees and officers under the Gratuity Act, 1972 as well as under the provisions of Bipartite Settlement [for bank officers as per Officers Service Regulation (OSR)] whichever is higher. The Gratuity is paid to employees and officers of SBI only under the Gratuity Act.
Q: What is the major difference between Gratuity paid under Gratuity Act and to other system?
Ans.: They are basically different in method of calculation of Gratuity. The method of calculation of gratuity under both the system is as under.
- Calculation method of gratuity payment under the Payment of Gratuity Act, 1972
(Last drawn Salary x 15 days x Number of years of service) divided by 26
Under Payment of Gratuity Act, 1972, the service in excess of six months is taken as full year for calculation of gratuity.
*The payment of Gratuity is restricted to a ceiling of Rs.20 lakh after amendment to the act. (Present ceiling is Rs.10 lakh)
Example: If a person retires after 28 years 7months continuous service, his gratuity is calculated as follows.
(Last drawn salary×15×29)÷26
*The payment of Gratuity is restricted to a ceiling of Rs.20 lakh after amendment to the act. (Present ceiling Rs.10 lakh changed to Rs.20 lakh with effect from 29.03.2018 vide Gazette notification [No. S-42012/02/2016-SS-II]
2.Calculation method of gratuity payment for the employees not covered under the Act
Half month’s average salary for each completed year of service.
No ceiling on gratuity payable
(The number months exceeding six months, will not be considered as a full year).
Example: If a person retires after 30 years and 8 months of continuous service, his gratuity is calculated as follows.
Calculation of gratuity payable:
(Average salary of preceding 10 months×30) ÷2
i. No ceiling on gratuity payable
ii. [The average salary is taken as the average of the salary of last 10 months immediately preceding the last working month.]
Q: Whether last paid means all allowances included?
Ans.: Salary includes basic salary plus the dearness allowance and other allowances eligible as per bipartite settlement between employees and establishment.
Q: Whether gratuity received is Taxable?
Ans.: The gratuity received by government employees is not taxable. In the case of non-government employees, as per present rule, the gratuity paid to an employee up to Rs.10 lakh (to be increased to 20 lakhs) is exempted from income tax and anything more than the above amount shall be accounted for taxable income of the financial year.
- Tax rules for the employees covered under the Act:
The least of the following (Gratuity amount) is exempted from tax:
a) Ceiling of Rs .10 lakh (after amendment of Gratuity act, ceiling will be Rs.20 lakh)
b) Actual gratuity received.
c) Gratuity calculated as per formula 1 (under gratuity act).
2. Tax rules for the employees not covered the Act,
The least of the following is exempted from tax:
a) Rs 10 lakh as per existing rule (Rs.20 lakhs after amendment)
b) Actual gratuity received.
c) Half month’s average salary for each completed year of service.
Q: How gratuity paid by banks?
Ans.: There is no ceiling for Gratuity payable to bank employees under BPS/OSR/Gratuity Act. When an employee or officer retires from the Bank, his/her Gratuity entitlement would be calculated both under the Act and under BPS/OSR. The higher of the two will be paid. In case of amount paid is in excess of the limit fixed under above methods of calculation then such excess amount is taxable under income tax act.