Lost Gratuity and Hopping Jobs

Are you ruining your decision not to change jobs while your peers jumped more than two or three times to land fatter salaries? Don’t worry because patience is not only a virtue but can also be very rewarding in financial terms. If you have completed at least five years of service, you are eligible for a fat lump sum payment in the form of gratuity when you are finally bidding farewell to a company. Your former colleagues, who changed every two or three year for lucrative new offers, will not be eligible for the same benefit.

Gratuity used to be one of the three major retrial benefits along with employees’ Provident Fund and pension. The objective was to make it lucrative for an employee to stay in the company in the long term and reap benefits. But unlike the retention bonuses that companies now offer to select employees’ gratuity used to be for all employees in a company.

However, gratuity has lost favor over the years because job hopping has become a norm. The average employee now changes jobs every 2-4 years.

Besides patience is in short supply in this era of instant gratification. Youngsters today are more concerned with cash in hand than what comes to them after 10-20 years. They do not think of long term benefits and give no significance to gratuity.

This can be a costly judgment error. Even what a small hike in your basic salary, your gratuity corpus can assume gigantic proportions over the long terms. If someone starts his career at a basic salary of Rs 30,000 and gets a nominal 10% increment every year, his gratuity at the end of 20 years will be Rs 14.1 lakh however the payment of Gratuity Act, 1972 paces a cap of Rs 10 lakh on the amount that a company has to pay as gratuity although a company is free to give more if it wants to.

What’s more the tax exemption limit for gratuity has now been raised to Rs 10 lakh which makes this long term benefit even more attractive. You should consider the fact that a, lump sump of up to Rs 10 lakh you get is tax free while the raise in your next salary would be taxable.

It is mandatory for companies with more than 10 employees on their payrolls to give gratuity to an employee on resignation, retirement and termination of services. However an employee is eligible for this benefit only on completion of five years of continuous service with the company. This condition of minimum five years of service is relaxed in the case of death or permanent disablement of the employee.

Gratuity is calculated as 15 days salary for each completed years of service. The salary includes your last drawn basic salary and dearness allowances but excludes all other allowances. For instance if you have completed seven years of services and the last drawn is Rs 45,000 you are entitled to a gratuity of Rs 1.8 lakh.

The gratuity rules are lenient when it comes to calculating the completed years of service. If one has put in more than six months during a year, it shall be treated as one complete year.

How is gratuity taxed?

Tax exemption to gratuity is the last of the following:

1) Actual amount received
2) 15 days salary for each year of service
3) 10 lakh.

No tax for government employees:

Gratuity rules are skewed in favor of government employees. For them, gratuity is fully exempt from income tax. For private sector employees gratuity is exempt up to Rs 10 lakhs. This limit has recently been raised from Rs 3.5 lakhs to make gratuity more attractive.

Gratuity on death:

In case gratuity paid on the death of an employee, the amount received by a nominee is tax free subject to maximum exemption of Rs 10 lakh.

Excess payment:

If a company pays more than the gratuity amount as per the calculation given in the Gratuity Act, 1972 the excess amount is taxed as income at the applicable rate, if the gratuity adds upto to Rs 8 lakh but the company pays the employee Rs 10 lakh the excess Rs 2 lakh will be taxed even though it is within the tax free limit.

Excerpts from Ascent

  • DK

    I am 48 years old ex-serviceman. 
    My previous company agreed on a annual salary package for me. But of that package, it started showing a fat amount of my salary as the Gratuity deduction in the salary slips. I had to leave the company in 21 months because of stressed work conditions including very long outstation tours. Now they have held up those gratuity deductions which I thought were part of my salary only. Are they right in not paying me. 

  • Lchandar

    If an employee who has completed less than 5 years service transfers from the Holding Company to Subsidiary company can the amount of gratuity be transferred to the subsidiary company’s employees gratuity fund?