Here’s How You Can Get Your Gratuity From Past Employer And Its Tax Implications

Gratuity is a token of appreciation which companies pay to their employees as a reward for loyalty. But it is tax-free up to a certain limit. You can also take it out before five year of service, but you might be liable to pay taxes on the withdrawal
Here’s How You Can Get Your Gratuity From Past Employer And Its Tax Implications

Every time you join a new company, some of your ‘cost to the company’ (CTC) goes towards gratuity. However, you are not rewarded with gratuity every time you leave an organisation. That’s because there are certain rules regarding the payout of gratuity. Then, there are other rules about its taxability, too. For a lot of employees, this amount, if it gets paid out, is tax-free, but there’s no uniformity on this.

What Is Gratuity?

Gratuity is a component of one’s salary, which is not paid out in the monthly salary figure, but instead paid out as a lump sum benefit on fulfilment of certain conditions. The Payment of Gratuity Act, 1972 governs all aspects related to gratuity.

Although gratuity is part of one’s salary, but unlike Provident Fund, it is not deducted from salary, meaning that employees are not required to contribute to it. However, one can be covered under the Gratuity Act, and depending upon this, the income tax exemption is arrived at.

When Is Gratuity Paid?

Gratuity is liable to be paid in cases of the following three conditions.

When an employee has completed at least five years of continuous service. However, if the company is following a five days a week work schedule, then four years 190 days is accounted for, and if the company is following a six days a week schedule, then four years 240 days are the minimum number of days required for gratuity.

According to Aditya Chopra, managing partner, Victoriam Legalis - Advocates & Solicitors, a Mumbai based law firm, section 4(2) of the Payment of Gratuity, 1972 spells out the condition on the eligibility of an employee for gratuity in the event of him not completing the full five year period. The section says that for every completed year of service in excess of six months, the employer shall pay gratuity to an employee.

"That means if an employee works in the establishment for more than 6 months in a year, he shall be eligible to get gratuity at the prescribed rate. So, if an employee completes 4 years and 6 months of continuous service in the same establishment, he is eligible to get gratuity as per the Payment of Gratuity Act 1972," Chopra further added.

According to Sandeep Bajaj, managing partner, PSL Advocates & Solicitors, a New Delhi based law firm, clause (1) of Section 2A of the Payment of Gratuity Act, 1972 defines 'continuous service' as uninterrupted service including service interrupted by sickness, accident, leave, absence from duty without leave etc. Moreover, the said Section lays out the situation wherein when an employee is not in continuous service within the meaning of clause (1), for any period of one year or six months, he shall be deemed to be in continuous service under the employer for the said period of one year, if the employee during the period of twelve calendar months preceding the date with reference to which calculation is to be made, has actually worked under the employer for not less than—
(i) one hundred and ninety days, in the case of any employee employed below the ground in a mine or in an establish-ment which works for less than six days in a week (5 days a week)
(ii) two hundred and forty days, in any other case (6 days a week).

One may also withdraw the gratuity amount on attaining the retirement age i.e., 60 years.

If an employee dies or becomes disabled due to any accident or disease, then also he/she is eligible to withdraw the gratuity amount before the completion of five years.

Also, one has to either resign or retire from the current employment, otherwise, they will not be eligible for gratuity. However, it is pertinent to note that temporary employees or interns are not eligible for gratuity.

Says Archit Gupta, founder and CEO, Clear, “gratuity can also be given if termination of service has happened due to no fault of the employee.”

In large companies, which have tens of thousands of employees, the company may appoint a service provider for a gratuity insurance plan. What essentially happens is that the company pays a fixed sum pertaining to each employees share to the said service provider, and the service provider takes the responsibility to pay the gratuity amount to the eligible employees at the appropriate time.

How To Calculate Tax Exempt Portion of Gratuity?

According to the Payment of Gratuity Act, 1972, every individual working in a factory, mine, oil field, railways, plantation, shops and establishment is entitled to gratuity. This includes, every individual who is working in a factory, mine, oil field, port, railways, plantation, shops and establishments, or educational institution having 10 or more employees on any day in the preceding 12 months.

Here’s what is exempt for them (least of the following).

  • Last salary (basic plus dearness allowance) multiplied by the number of years of employment and then further multiplied by 15 divided by 26.
  • Rs 20 lakh.
  • Actual gratuity amount

For those who are not covered by the Payment of Gratuity Act, 1972, the rules are slightly different.

Here’s what is exempt for them (least of the following).

  • Last 10 months’ basic salary plus dearness allowance multiplied by the number of years of employment further multiplied by 1 divided by 2 (1/2).
  • Rs 10 lakh.
  • Actual gratuity amount.

How Can Family Members Claim Gratuity Amount of The Deceased?

After the demise of the employee, the employer will pay the gratuity amount to the nominee. The legal heir of the deceased is the rightful beneficiary for this gratuity amount.

The employer has to fill up ‘form F’ and submit it to the concerned department in his company in order to assign a nominee. 

“If no nominee is assigned, then it is given to the legal heir, adds Gupta.

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