Sunday, 17 June 2012

Retirement Benefit- Who Am I?

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You can get me, if you stay with your company for atleast 5 years. Only employees on payroll are entitled to claim me, meaning contractors are not eligible.I am completely Tax free upto 10 Lakh. Guess Who Am I?

You guessed it Right!!!, if your answer is "Gratuity". In this article let us peep into some of basics of Gratuity.

  • Who is Eligible: You are eligible for Gratuity benefit, only if you complete 5 years of continuous service with the company. You need to be on the company payroll as permanent employee and not working as a contractor. In case of death of an employee Gratuity would be paid even if the employee had not completed 5 years.
  • Who Gets the Gratuity amount: Gratuity amount is paid to the emoployee. In case of death, the gratuity amount is paid to the nominee. Amount would be paid to Heirs in case of absence of Nominee.
  • Gratuity Calculation: (Last Drawn Salary/26) * 15 * Number of years of service.
  • Taxation for Gratuity Amount:
    -
    Fully Exempted if you are government employee.
    - Exempted up to 10 Lakh, if you are private employee.
          
Let us look into a scenario: Below table shows the Gratuity amount for an employee who joins the organization with Basic Salary of 25K and Gets an increment of 12% year. His gratuity amount at the end of 20 Years will be 24.84 Lakh.

Years of Service
Basic Salary
Gratuity Amount
1
25000
0
2
28000
0
3
31360
0
4
35123
0
5
39338
113475
6
44059
152510
7
49346
199280
8
55267
255079
9
61899
321399
10
69327
399963
11
77646
492755
12
86964
602057
13
97399
730495
14
109087
881090
15
122178
1057308
16
136839
1263131
17
153260
1503125
18
171651
1782530
19
192249
2107346
20
215319
2484450

Note : Values shown have been rounded off and are approximate value   

Smart Tips:
  • Looking for company Change: If you are nearing completion of 5 years in your current organization, it makes sense to complete 5 years then look out for change.  Click Here to read "Should you change your job for Monetary Benefits?"
  • Exemption limit of 10 Lakh: If you have already received a gratuity 6 Lakh from previous employer (this is completely tax free as you are with in the exemption limit). Now later if you get another 6 Lakh as gratuity amount, in this case only 4 Lakh is exempted from tax and 2 Lakh is taxable income.
  • Negotiate you salary structure:In case there is an opportunity to negotiate your salary or design your salary/CTC , it makes sense to go for higher Basic salary as Gratuity is directly dependent on your basic salary.
  • 6 months or more is considered as one year.  For example in the gratuity formula (Last Drawn Salary/26) * 15 * Number of years of service),   5 years 6 months and above is considered as 6 years.  Anything below 5 years 6 months is considered as 5 years.
Addtional Reading for Retirement schemes:
The intend of article is to cover the basics of Gratuity. In case you have any query please post it in comment section.Have you calculated your Gratuity amount?

4 comments:

Anonymous said...

will 4 years 7 months will be considered as 5 years and we are eligible for Gratuity?

WealthUCreate said...

4 years 7 months is not 5 years. You would not be eligable for gratuity. However 5 years 7 months is 6 years.

justgrowmymoney said...

Good one wUc

Shankarraju said...

Eagerly waiting for a new article from you :)

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