Difference Between Gratuity and Pension in India

The main aim among most people is to create a retirement nest egg, which today needs far more financial planning than just paying bills. In order to maintain your lifestyle the way you've always been living, it is import

Updated: Saturday, February 20, 2021, 12:41 [IST]

The main aim among most people is to create a retirement nest egg, which today needs far more financial planning than just paying bills. In order to maintain your lifestyle the way you've always been living, it is important to have enough money after your retirement.

You will find it difficult to manage your life with the sum you have in hand if you have not planned your retirement with the right investment schemes.

You will lose principal and interest if you withdraw your retirement savings today, and you can lose tax incentives or have to face withdrawal fines. Therefore, it is best not to touch on the savings reserved for retirement.

Any employee needs to be compensated after completing a long time of service to the company and the economy of the country. This is why they are entitled to earn retirement payments so that they can remain self-sufficient and socially independent.

Although a few programs enable the employee to pay in part to the firm, most are solely supported upon retirement by the entity. Such two other retirement perks are pension and gratuity.

Gratuity

Gratuity is the amount of money earned by an employee as a means of appreciation for his service to the company. A lump-sum fee is paid to the employee in this scheme based on the years of employment and the last paycheck is drawn. An employee is entitled to earn a gratuity, after servicing the company for five or more years.

The amount will be compensated upon termination due to Superannuation, retirement, resignation, or death, disability due to an injury or sickness.

The 5 years of service do not apply in the event of death or injury of the employee as a result of an accident or sickness.

Gratuity is calculated using the below formula:
Gratuity Amount = (15 X last drawn salary X period of employment)/ 26

Use the Gratuity calculator to calculate your gratuity

Tax on Gratuity

The Centre's newly approved amendment expanded the maximum amount of gratuity. It is now excluded from tax till Rs 20 lakh of the previous ceiling of Rs 10 lakh, which falls from Section 10(10) of the Income Tax Act.

Pension

Pension means a certain amount paid in periodic installments to a person after retirement. Pension benefits shall become effective for employers who have represented the same company for at least 10 years. It is a service provided by the employer that could be a government establishment or any other organization to the ex-employee or his dependent families permanently. The pension is a scheme in which the company adds a certain amount over the years of employment. It is a form of retirement scheme that guarantees a monthly income after the termination of service. Pension becomes payable on retirement, death, or injury of an employee.

Tax on Pension

According to the laws of taxation, an uncommuted pension is considered to be a salary under the Income Tax Act, 1961, and is thus taxable.
When an employee receives a lump-sum pension, it is referred to as a commuted pension, whereas when their pension is received on an annual basis, it is referred to as an uncommuted pension.

Comparison table

COMPARISON	GRATUITY	PENSION
Meaning	Gratuity is the amount of money earned by an employee as a means of appreciation for his service to the company.	Pension means a certain amount paid in periodic installments to a person after retirement.
What is it?	Gift	Retirement plan
Payment	Lump-sum payment	Monthly Payment
Provided by	Employees' pension (amendment) Scheme, 2017	Payment of gratuity act, 1972
Minimum Service	Minimum 5 years of service is required.	Minimum 10 years of service is required.