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Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
Gratuity is a financial benefit employers provide to employees who complete at least five years of service, ensuring financial security upon retirement, disability, or death.
Gratuity is like a special thank-you note from your employer, given to you for your long-term service with the company. Imagine it as a token of appreciation for your loyalty and hard work over the years. It’s not just a salary bonus or a perk; it’s a statutory right for employees who have dedicated a significant portion of their working lives to an organization.
Gratuity is a lump sum payment made by an employer to an employee as a mark of gratitude for their continuous service. In many countries, including India, gratuity is governed by specific laws—in India, it’s under the Payment of Gratuity Act, 1972. This law ensures that employees receive a certain amount of money based on their tenure and last drawn salary.
Gratuity payments boost the overall happiness and satisfaction of employees, benefiting both the company and its workers.
Recognition of Long-term Service
Gratuity is a way to show employees that their dedication and loyalty to the company are truly appreciated. When workers see that their efforts are recognized and rewarded, they are happier and more satisfied with their jobs.
Family Support in Case of Untimely Demise
In the sad and challenging event of an employee passing away while still employed, gratuity is a crucial form of financial support. This system is designed to provide the employee’s family with much-needed monetary assistance during such a difficult time. The gratuity helps the family manage the sudden loss and offers some financial stability as they navigate through their grief and the immediate practicalities that follow such a tragic event.
Tax Benefits
When you retire, one of the financial perks you can look forward to is a gratuity payment. Now, the good news is that this gratuity amount can be partially or fully exempt from taxes, depending on certain conditions. This means you might pay less in taxes, which can significantly lighten your financial load. With these tax savings, you’ll have more money available to cover your expenses after retirement, whether for daily living costs, travel, healthcare, or any other needs you might have. It’s a helpful way to ensure you can enjoy your retirement without as much financial stress.
Compliance with Legal Obligations
Giving gratuity is a crucial way for employers to stay on the right side of the law, specifically following the guidelines set out in the Payment of Gratuity Act. This practice not only helps businesses comply with legal standards but also fosters a culture of responsibility and ethical employment.
Increased Employee Motivation
When employees know they will receive a substantial payout at the end of their service, it makes them feel genuinely appreciated and valued. This recognition boosts their motivation, inspiring them to work harder and strive for excellence in their roles. It creates a sense of purpose and commitment, as they understand that their efforts are acknowledged and rewarded.
Enhanced Employer-employee Relations
When employers handle gratuity payments transparently and promptly, it builds trust and goodwill with their employees. This approach contributes to a positive work environment where everyone feels respected and valued.
Attraction of Experienced Talent
Organizations offering gratuity can attract experienced professionals, demonstrating a commitment to recognizing and rewarding long-term service. Additionally, the promise of a gratuity benefit motivates employees to remain with the organization long-term, enhancing employee retention and loyalty.
If a company has more than 10 employees, it must follow the Rules of the Gratuity Payment Act 1972. This can include employees working in mines, shops, factories, ports, railways, plantations, or any organization with 10 or more. To qualify for gratuity, an employee must have worked continuously for the company for 5 years or more, regardless of their job.
To be eligible for gratuity based on salary, the main rule is that an employee needs to have worked continuously for at least five years with one company. Besides this basic requirement, there are other rules you need to meet to qualify for gratuity in India.
Companies with at least 10 employees on any single day within the past 12 months are obligated to provide gratuity to their employees. Even if the workforce size drops below 10, the organization must still calculate and disburse gratuity.
Gratuity is disbursed when an employee ceases employment with the organization due to various reasons, including:
If an employee meets these criteria, they can receive gratuity payments. Even if a company goes bankrupt, it still has to make these payments to eligible employees as per current regulations
Sometimes, even if an employee meets all the requirements, an employer might decide not to give them their gratuity payment. This could happen for various reasons, such as:
The rules for gratuity are laid out in the Payment of Gratuity Act of 1972. If a company has 10 or more employees, they are required to provide a gratuity, which continues to apply even if their workforce later drops below 10. To qualify for gratuity, an employee must have worked continuously for at least five years with the company.
If an employee passes away, their nominee or legal heir receives the gratuity, and these payments are not taxed. If an employee becomes disabled due to an accident or illness, they still qualify for gratuity.
However, if an employee is terminated due to misconduct, fraud, theft, or assault, they lose their right to claim gratuity from the company. Even in bankruptcy cases, an employer must fulfill gratuity payments and cannot deny them.
The formula for gratuity calculator, as outlined in the Gratuity Payment Act, 1972, varies depending on the employment category. The Act categorizes employees into two groups:
The following section details how gratuity is calculated for each category:
For employees covered under the Gratuity Act, the formula is:
Gratuity (G) = N x B x (15/26)
Where:
N = Number of years of continuous service in the organization
B = Last drawn basic salary
In this case, the calculation assumes a month with 26 working days.
Employees in organizations not covered by the Gratuity Payment Act are still eligible for gratuity. However, the calculation differs:
Gratuity (G) = N x B x (15/30)
Where:
N = Number of years of continuous service in the organization
B = Last drawn basic salary
Here, the calculation uses a month with 30 days instead of 26 days as used for employees covered under the Act.
If an employee passes away, the gratuity benefits are computed according to their length of service, with a maximum limit of Rs. 20 lakh applicable to the amount.
Gratuity enjoys tax advantages up to specified limits under the Income Tax Act. Employees need to understand these tax implications to manage their finances effectively. The tax treatment varies depending on whether the employee is employed in the government or private sector:
Government Employee: Employees working in central government, state government, or local authorities are fully exempt from tax on their gratuity amount.
Covered Private Employee: For other eligible private sector employees, the exempted amount is the least of the following:
Any gratuity exceeding this limit is taxable according to the employee’s income tax bracket.
Not Covered Employee: Employees not covered under the Gratuity Act have different exemption limits:
1
The maximum limit for gratuity payment is ₹20 lakh, as per the current regulations.
2
Gratuity applies to all employees covered under the Gratuity Payment Act, 1972, which includes those in organizations with 10 or more employees.
3
Yes, an employee can receive gratuity if they resign, provided they have completed at least 5 years of continuous service with the organization.
4
Gratuity is applicable to contractual employees if they meet the eligibility criteria of continuous service for at least 5 years, as stipulated under the Gratuity Payment Act, 1972.
5
In the event of an employee’s death, gratuity benefits are calculated based on the length of the employee’s service, with the maximum amount capped at ₹20 lakh. The gratuity is typically paid to the nominee or legal heir of the deceased employee.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
