Gratuity is a paid to those employees who renders a continuous service for at least five years in one organisation. It is the component of employee salary which is paid as a gratitude to the employees for serving in same organisation for five years. Gratuity can be considered as a retirement benefit plan, in which a certain amount is paid to the employee based on the duration of total service , but employee has to complete a minimum of five years of service with that employer. This is the compulsory criteria to claim this amount.
Gratuity came into existence with the introduction of Payment of Gratuity Act, 1972. This act was applicable to any company in which ten or more persons are employed, or were employed, on any day of the preceding twelve months.
For government employees it is completely exempt from tax. For private sector, it is exempt from tax subject to a maximum of Rs 10 lakhs or 15 days salary for each completed year of service.
GRATUITY = LAST DRAWN SALARY × 15/26 × NO. OF YEARS OF SERVICE
The ratio 15/26 represents 15 days out of the 26 working days in a month
Last drawn salary = Basic Salary + Dearness Allowance
It gets paid to the employee post retirement or if he resigns after at least working for five years with same employer. In case of death or disability of the employee, it can be claimed by the nominee or by heirs and minimum service duration criteria doesn’t apply in this case.