People often believe that a minimum of five years of service is required to receive gratuity. However, this requirement does not apply in certain situations. However, gratuity is calculated differently in those situations. Learn more about this here.
To receive gratuity, five years of continuous service with a company is required. However, if an employee dies or becomes disabled in an accident before completing five years, what will happen to the gratuity? Will they be paid the gratuity amount in this situation? This question is likely on many people’s minds. Here’s what the government rules are in this regard.
What is gratuity and what does the 5-year rule say?
Gratuity is the amount a company pays its employees in return for long and worthy service. It’s a reward an employee receives upon leaving or retiring. Normally, if you’ve worked for a company for five consecutive years, you’re eligible for gratuity. However, there are specific conditions under which the five-year rule doesn’t apply. In such cases, your family or you yourself may receive gratuity, but the calculation formula changes.
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The 5-year rule does not apply in these two conditions!
According to the Gratuity Act 1972, there are two conditions where the 5-year rule does not apply:
On the death of the employee
If an employee dies while employed, the 5-year term is not waited for. In such cases, the gratuity amount is paid to the employee’s nominee or dependents. You can register your nominee by filling out Form F at the time of joining the job.
When the employee becomes disabled
If an employee becomes disabled in an accident and due to this he is not able to work again, then he also has the right to claim gratuity without completing the period of 5 years.
The calculation formula changes!
hen an employee dies or becomes disabled, they still receive gratuity, but the calculation formula changes. The normal calculation formula is: (last salary) x (number of years worked at the company) x (15/26). However, in these special cases, the formula works as follows:
- Service less than 1 year: Double the basic salary is received as gratuity.
- More than 1 year but less than 5 years of service: 6 times the basic salary is given.
- More than 5 years but less than 11 years of service: 12 times the basic salary is given.
- More than 11 years but less than 20 years of service: Up to 20 times the basic salary is given.
- 20 years or more service: 33 times the basic salary is given.
Tax rules on gratuity
According to the Income Tax Department, gratuity is taxable only if it exceeds a certain threshold. The current threshold is up to ₹20 lakh, meaning that gratuity amounts up to ₹20 lakh are not taxable. However, if the amount exceeds ₹20 lakh, any amount above this threshold will be taxable.
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FAQs
Q1: What is gratuity?
A1: Gratuity is the amount of money a company gives its employees as a reward for long and good service. It is given upon leaving the job or retirement.
Q2: What is the maximum limit of gratuity?
A2: The company can give gratuity up to a maximum of ₹20 lakh only.
Q3: How to enter the name of the nominee?
A3: The name of the nominee is entered by filling Form F at the time of joining.
Q4: Who gets the gratuity if death occurs before 5 years?
A4: In such a condition, the gratuity amount is given to the employee’s nominee or his dependents.
Q5: How is gratuity calculated in case of death?
A5: Gratuity can be given from 2 to 33 times the basic salary depending on the years of service of the employee.
