Gratuity is a kind of payment created by the workplace to a worker for long services rendered by him. Gratuity may be received by a worker on his pension or on his becoming incapacitated preceding to old age or on termination of his job. Gratuity received by Central and State Employees are completely exempt from TAX. Gratuities received by private sector employees are exempt from TAX for up to Rs.10 lakhs.
You should use the following formulas to analyze gratuity in India:
Private Employees protected under the Repayment of Gratuity Action, 1972
For private sector employees protected under the Repayment of Gratuity Work, 1972, gratuity calculation for a private company is determined using the following gratuity formula:
Formulation: Salary during pension ÷ 26 x 15 x Completed yr of service.
While determining the completed calendar year of service, you round off based on whether it is higher or lesser than six months. For instance, if the period of service is 18 years seven months, it will round up to 19 years. In case the period of service is 18 years six months, then it will be 18 years.
Private Employees Acquiring Gratuity according to Employment Contract
For private sector employees acquiring gratuity according to conditions of career (not protected under the Repayment of Gratuity Take action, 1972), the next formula can be utilized for determining gratuity:
Method: Average salary ÷ 30 x 15 x Completed time of service.
While determining average salary, compute the basic wage of the previous ten calendar months immediately preceding the month of old age. Also, as reviewed above, while deciding completed years of service, disregard the part of a few months.
Tax Exemption for Gratuity
Any amount of gratuity received by Federal and state Employees including Defense workers is entirely exempt from TAX. Alternatively, private sector employees like a maximum lifetime exemption of Rs.10 lakhs per annum or the substantial amount received. In the event the gratuity is accepted in one or more business employers, the sheer amount of exemption can still not go over the maximum limit of Rs. 10,00,000.