In India, every salaried individual receives some monetary benefits on retirement. Gratuity is one prime retirement corpus that companies offer as a token of gratitude for the services provided.
Governed by the Payment of Gratuity Act, 1972, employers are responsible to pay this gratuity amount from their funds. They can also avail a group gratuity plan in collaboration with an insurance provider.
The payable monetary benefit depends on the applicable gratuity calculation formula, which varies with categories. There are some rules and conditions which every employee must know before claiming their gratuity benefits.
6 essential things to know about gratuity in India
- According to India’s Gratuity Act, establishments employing at least 10 employees should mandatorily pay gratuity benefits. Once a company comes under the Act’s purview, it must continue to offer gratitude even if the number of employees reduces. Generally, railways, mines, factories, oilfields, ports, plantations, etc. are covered by Payment of Gratuity Act, 1972.
- Although a retirement corpus, an employee can claim gratuity benefits on resigning from an enterprise. However, he/she must have provided continuous services for at least 5 years. Gratuity is also payable on an employee’s death or physical disability due to any disease or accident, before 5 years of service. This benefit is offered to the deceased employee’s nominee or legal heir.
- Gratuity calculation formula is different for employees covered under the Act and those excluded. The general formula is – last drawn salary x 15/26 x total service years completed.
- For employees who are not within the Act, 30 working days is considered as 1 month. Hence, the gratuity calculation formula stands as last drawn salary x 15/30 x total service years completed.
- The gratuity fund employees receive under the Payment of Gratuity Act is eligible for tax exemptions. Recently, the government has doubled this exemption limit on gratuity to Rs.30 lakh. Government employees enjoy complete tax exemption on the amount received as gratuity.
- In case of death of an employee, his/her tenor of service is considered for the gratuity calculation formula.
For example, if service years are less than 1 year, the rate is 2 times the basic salary. Similarly, for service tenor between 1 and 5 years, the rate is 6 x basic salary. The gratuity rate is 12 times the basic pay when service years are 5 to 11 years. For 11 to 20 years, the rate considered is 20 x basic salary. However, if the employee’s service tenor is more than 20 years, the rate is ½ of the payments for every six months completed, up to 33 times of payments.
Employers can partially or wholly forfeit the gratuity payable if the respective employee faces termination due to involvement in an offensive activity, an act of violence, disorderly or riotous conduct.
Additional rules regarding gratuity in India
There are certain rules regarding gratuity which both employers and employees must abide by –
- An eligible individual should claim the gratuity benefits within 30 days, from when it became payable.
- An individual can also submit the application before 30 days if the retirement or superannuation date is known.
- If an employee applies for gratuity post the 30 days and shows a valid reason for this delay, the company cannot reject his/her application.
- Also, they cannot regard a claim as invalid only because the application was not filed within 30 days.
- Once the employer receives an application qualifying all criteria, he/she must make the payment within 15 days.
As gratuity is primarily offered as monetary assistance to employees post their retirement, a strategic investment plan to suit your life goals is crucial. You can opt for a corporate FD to generate safe and guaranteed returns on the investment.
One of the reputed financial organisations, Bajaj Finance, provides their Fixed Deposit at attractive interest rates. Investors can avail benefits like emergency loan against the corporate FD, online application process, auto-renewal facility, multiple deposits through a single cheque payment, systematic deposit plan, etc.
Investing in fixed deposits is also one of the several ways that help you to save money for retirement.
As the earning period usually ends with retirement, you must make the best use of gratuity fund to ensure a regular flow of income. Know everything about gratuity beforehand to utilise the money strategically.