Very few individuals consider the need to understand what is gratuity. Gratuity is actually paid by the employer as a gratitude for the services rendered and is a good retirement benefit for an employee. Employee could leave their job for various reasons, but, gratuity is particularly helpful on retirement.
As per the Income Tax Act, gratuity has to be paid when an employee completes five or more years of full time service with the employer.
When is gratuity made payable?
There are certain conditions when gratuity is pace payable. First, the organisation should have at least a minimum of 10 people on its payroll. It's pertinent to note that you cannot have temporary workers on your roll and these have to be salaried employees on the payroll of the organisation.
An individual has to complete at least 5 years with the organisation. However, if an employee dies during the tenure of his employment, the 5 year rule is relaxed. So, even if such employee's period of service is as little as 1 year, he / she is eligible to receive gratuity if the first condition is met.
Is it taxed?
The amount of gratuity that is received by an individual is taxed as salary income under the head 'Income from salaries', while filing your income tax returns. If the individual is a government employee, then according to the provisions of Section 10 (10) of the Income Tax Act, the gratuity amount paid is completely tax free. Good luck for government employees.
Amount of gratuity to be paid...
The amount of gratuity to be paid is 15 days salary for every completed year of employment (salary is average salary received in the last 10 months of service.)