Gratuity is a monetary benefit given by an employer to an employee for rendering long and meritorious services. It is mandatory for companies with ten or more employees as per the Payment of Gratuity Act, 1972 in India. The primary purpose of gratuity is to provide financial security to the employee after retirement or resignation.
Calculating Gratuity Amount:
The gratuity amount is calculated on the basis of the number of years of service and the last drawn salary of the employee. The formula for the gratuity calculation is as follows:
Gratuity = (last drawn salary x 15/26) x number of years of service
In this formula, 15 represents the number of days in a month, and 26 represents the number of working days in a month. The maximum gratuity amount that can be paid as per the current law is Rs. 20 lakhs.
To understand the formula better, let’s take an example. Suppose Mr. Raj has worked for 25 years in a company, and his last drawn salary was Rs. 50,000. The gratuity amount he will receive will be:
(50,000 x 15/26) x 25 = Rs. 7,21,154
Therefore, Mr. Raj will receive a gratuity amount of Rs. 7,21,154 after serving for 25 years in the company.
Withdrawal of Gratuity Amount:
The gratuity amount can be withdrawn upon retirement, resignation, death, disablement, or on the diagnosis of a life-threatening disease such as cancer, AIDS, etc. If the employee has completed five years of service, then he/she is eligible for gratuity. The employee needs to submit a written application to the employer mentioning the reason for withdrawing the gratuity amount. The employer needs to make the payment within 30 days of receiving the application.
The gratuity amount is taxable, but there are certain exemptions that can be availed under Income Tax laws. For instance, gratuity received by an employee who is covered by the Payment of Gratuity Act, 1972, is exempt from tax up to a certain limit. The limit of exemption is calculated as follows:
– Gratuity received for private sector employees – The least of the following is exempt from tax: 1) Actual gratuity received; 2) Rs. 20 lakhs; and 3) Last drawn salary x 15/26 x number of completed years of service.
For example, if an employee receives a gratuity amount of Rs. 10 lakhs, and his last drawn salary was Rs. 60,000 with 25 years of service, then the exempted amount will be:
2) Rs. 20 lakhs
3) 60,000 x 15/26 x 25 = Rs. 8,65,385
Therefore, the least of the three will be exempted from tax, which is Rs. 8,65,385. The remaining amount will be taxable as per the income tax slab of the employee.
FD Interest Rates in Post Office:
Apart from the gratuity amount, an employee can also invest in various schemes offered by the post office, such as Fixed Deposits, Public Provident Fund, National Savings Certificate, etc. Amongst these schemes, Fixed Deposits (FDs) are a safe and secure option for investment.
The fd interest rates in post office are beneficial for retirees and senior citizens who want to earn a regular income from their investments. The scheme also offers the option of premature withdrawal, but a penalty may be charged.
Conclusion:
Gratuity is an essential financial benefit that employees receive after serving long and meritorious service. The gratuity amount can be calculated using a formula that takes into account the number of years of service and the last drawn salary of the employee. The amount can be withdrawn upon retirement, resignation, or any other eligible event. The gratuity amount is taxable, and certain exemption limits can be availed to save taxes.
Apart from gratuity, investors can also opt for post office FDs, which offer attractive interest rates. The FDs are safe and secure and allow premature withdrawal with a penalty. It is advisable to gauge all the pros and cons of trading in the Indian financial market before making any investment decisions.
