How to calculate Gratuity: Taxation rules and eligibility
Taxation rules and eligibility for Gratuity; How to calculate your Gratuity
New Delhi: Gratuity is a salary component, received by the employee from his or her employer fr the services offered to the organisation. It is governed by the Payment of Gratuity Act 1972. According to Section 10 (10) of the Income Tax Act, an employee gets gratuity after he or she completes a minimum of five years of full-time service with the employer.
According to Payment of Gratuity Act, 1972, all the employees who are engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments, in which ten or more persons are employed are required to the pay gratuity to their employees.
Taxation rules for Gratuity-
According to Balwant Jain, tax and investment expert, “Limit of Rs 20 lakh for tax exemption on gratuity includes all gratuities received by an employee during his or her lifetime. If gratuity exceeds 15 days of salary for each completed year of service, the excess is taxable. In absolute terms as per the recent amendment of Payment of Gratuity Act, 1972, gratuity up to Rs 20 lakh is exempt. Any gratuity received beyond this limit is taxable.”
Three ways to calculate gratuity-
1. You can calculate your gratuity balance from the income tax website, www.incometaxindia.gov.in. From there go to ‘Tax Tools’ and search ‘Gratuity’ from the available options. The calculator on the website will compute the amount. For that you will require to provide details such as assessment year, type of employer, gratuity received exempted gratuity and taxable gratuity.
2. The other way is to check with your employer. It may be noted that the employer or the HR of the organisation keeps the complete information of all the employees.
3. You can use the formula to calculate yourself as well. The formula is 15 X (last drawn salary) X (tenure of working)/26. For instance, employee X’s last drawn salary is 50,000 per month and has worked with ABC ltd company for about 30 years. So, his gratuity will be calculated as: (15 X 50,000 X 30)/26= Rs 9,37,500. In this formula, the time period of more than six months is considered as one year.
The amount of gratuity payable to the employees who are not covered under this Act can be calculated on the basis of half a month’s salary for each completed year. The formula for this will be- 15 X last drawn salary X tenure of working)/30. Taking the above mentioned example, the gratuity in this case would be (15 X 50,000 X 20)/30 = Rs 5,00,000.