Gratuity is a retirement benefit paid to employees by their employer as a token of appreciation for their years of service. It is an important part of an employee’s compensation package and provides financial security after retirement. In this blog, we will discuss the importance of gratuity in our life.
What is Gratuity?
Gratuity is a retirement benefit paid to employees who have completed a certain number of years of service with their employer. The payment is made as a lump sum amount and is usually calculated based on the employee’s last drawn salary and the number of years of service completed. Gratuity is governed by the Payment of Gratuity Act, 1972, which mandates that all employers with 10 or more employees must pay gratuity to their employees.
Importance of Gratuity
1. Financial Security
Gratuity provides financial security to employees after retirement. It is a lump sum amount that can be used to meet their expenses during their retirement years. The amount received as gratuity can be invested in various financial instruments to earn a regular income.
2. Recognition of Service
Gratuity is a way for employers to recognize the years of service put in by their employees. It is a token of appreciation for their loyalty and hard work. It also motivates employees to continue working with the same employer for a longer duration.
3. Encourages Long-term Employment
Gratuity encourages long-term employment as it is paid only to employees who have completed a certain number of years of service with their employer. This motivates employees to stay with the same employer for a longer duration, which benefits both the employee and the employer.
Also know about: Is 4 years 7 months eligible for gratuity?
4. Tax Benefits
Gratuity is tax-free up to a certain limit as per the Income Tax Act, 1961. The limit is currently set at Rs. 20 lakhs, which means that gratuity up to Rs. 20 lakhs is exempt from tax. This makes gratuity an attractive retirement benefit for employees.
5. Helps in Retirement Planning
Gratuity helps in retirement planning as it is a known retirement benefit that employees can rely on. It provides financial security to employees after retirement and helps them plan their retirement years better.
How is Gratuity Calculated?
Gratuity is calculated based on the employee’s last drawn salary and the number of years of service completed.
Gratuity = (15 x Last Drawn Salary x Number of Years of Service) / 26
Here, Last Drawn Salary refers to the basic salary plus dearness allowance, and Number of Years of Service refers to the number of years of service completed by the employee.
Conclusion
Gratuity is an important retirement benefit that provides financial security to employees after retirement. It is a way for employers to recognize the years of service put in by their employees and encourages long-term employment. Gratuity is tax-free up to a certain limit and helps in retirement planning. Therefore, it is important for employees to understand the importance of gratuity and ensure that they receive this benefit from their employer.
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