GRATUITY

MEANING:
• Something given voluntarily or beyond obligation,
usually in response to or in anticipation of service.
• a gift of money, over and above payment due for
service.
• a relatively small amount of money given for
services rendered.
When are you entitled?
• Gratuity in earlier days was rather arbitrary and
completely hostage to the whims of the employer.
• This led to a lot of discord and finally the
government stepped in, passing the Payment of
Gratuity Act, 1972, making it mandatory for all
employers with more than 10 employees to give
them gratuity.
• Employees, as defined here, are the ones hired on
company payrolls. Trainees are not eligible and
gratuity is paid on the basis of the employee's
basic plus dearness allowance if any.
How much can you get?
You become entitled to a gratuity :
• on resignation or
• on retirement after five years or more of service

Gratuity amount = 15 days' wages X number of years

put in

Wages = Basic salary + DA

CALCULATION:
• Take the monthly salary drawn by you last (basic plus
dearness allowance) on resignation or retirement and
divide it by 26, assuming there are four Sundays in a
month. This is your daily salary.
• Multiply this amount by 15 days and further with the
number of years you have put into service.

Eg: if average monthly salary is Rs 50,000,

then the gratuity after 10 years = Rs.2,90,000
• For employees who do not fall under the Gratuity Act,

the amount due for them is :

½ average ten months'
salary x
number of years of service
 Tax treatment:
As per the formula under the Act:
• gratuity up to Rs 350,000 is exempted from taxes.
• for government employees any amount is non-taxable.
• Your employer could choose voluntarily to pay you
more gratuity; but any extra benefit that he pays, not
coming under the formula, will be taxable.

For instance, in the above example, if the employer

pays you Rs 350,000, the entire money is not tax
exempt; only the Rs 290,000 due under the formula is.
• Be it a lump sum above the due amount, or money that
you get before the stipulated five years, the
employer  is free to give you extra benefits.
• However, these sums are taxable if they exceed the
specified limit under the Act.
• In case of death of the employee, the family is
entitled to the gratuity immediately and the entire
amount is tax-exempt.
• However, if death occurs after the gratuity is due
then any amount above Rs 350,000 is taxable.
• The employer could also offer you an extra gratuity
by deducting a portion of your salary as the cost to
the company.
 To meet its liabilities towards gratuity, a company
either funds the money from its own pocket, or opens
a trust and puts in money for the gratuity fund. This
fund is then managed either by an insurer or an
actuarial company.
 PENSION
• A pension is an arrangement to provide people with
an income when they are no longer earning a regular
income from employment.
• The common use of the term pension is to describe
the payments a person receives upon retirement,
usually under pre-determined legal and/or
contractual terms. A recipient of a retirement
pension is known as a pensioner or retiree.
• Pensions should not be confused with 
severance packages; the former is paid in regular
installments, while the latter is paid in one lump
sum.
Benefits:
• A pension created by an employer for the benefit
of an employee is commonly referred to as an
occupational or employer pension.
• Occupational pensions are a form of 
deferred compensation, usually advantageous to
employee and employer for tax reasons.
• Many pensions also contain an insurance aspect,
since they often will pay benefits to survivors or
disabled beneficiaries, while annuity income
insures against the risk of longevity.
Types of pensions:
Employment-based pensions (retirement plans)
• Often retirement plans require both the employer
and employee to contribute money to a fund
during their employment in order to receive
defined benefits upon retirement.
• Funding can be provided in other ways, such as
from labor unions, government agencies, or self-
funded schemes.
Social / state pensions
• Many countries have created funds for their
citizens and residents to provide income when
they retire (or in some cases become disabled).
• Typically this requires payments throughout the
citizen's working life in order to qualify for
benefits later on.
For examples, see National Insurance in the UK,
or Social Security in the USA.
Disability pensions
Some pension plans will provide for members in
the event they suffer a disability. This may take
the form of early entry into a retirement plan for
a disabled member below the normal retirement
age.
TAX TREATMENT
Case Particulars Tax treatment
Case Pension is received from UNO It is not chargeable to tax
1 by the employee or his family
members
Case Family pension received by the It is exempt under section 
2 family members of armed 10 (19) in some cases.
forces (after the death of the
employee)
Case Family pension received by the It is taxable in the hands
3 family members of other of recipients under section
cases  (after the death of the 56 under the head “income
employee) from other sources”.
Standard deduction is
available under section 57
which is 1/3 of such pension
or Rs. 15000, whichever is
lower.
Case Pension received by an employee Tax treatment depends on
4 (during his lifetime) in any whether Pension is
other cases. Commuted or Uncommuted
(Refer Below).
• Uncommuted pension whether received by a Govt. or
a Non Govt. employee is chargeable to tax in both
cases
• However Commuted pension in case of Govt. is fully
EXEMPT from tax but in case of Non Govt. employee
is exempt on following basis:

 Situation Tax Exemption available

If Gratuity is received One-third of the pension,
which he is normally entitled
to receive, is exempt.

If Gratuity is not received One-half of the pension which

he is normally entitled to
receive is exempt.
   How much can you get?  
The income that you will get from your pension when
you retire depends on two main things: 
•  The kind of plan you have.
•  How long you have been with your company.
 What will you get from my 
defined benefit pension plan?
Before you retire, you will know exactly what you’ll get
each month. Your plan administrator can help you
figure it out. It may be one of these common types:

Final average earnings:

This plan bases your pension on how much you made
over your last few years with the company. Often it’s
the last five years. Some plans take the best five
years out of the last 10. The best plans take the best
three years out of your last 10.
 Career average earnings: 
This plan bases your pension on your average income
over your years in the plan. For instance, your
pension may equal 1.5% of what you earned on
average.
  Flat benefit plan: 
Union workers on short-term contracts often have
these plans. Your employer works out with the union
how much pension you get for each hour on the job.
The money goes into a pension fund where a board
of trustees oversees the investments.