gratuity - compensation management - manu melwin joy
TRANSCRIPT
GratuityCompensation Management
Prepared By
Kindly restrict the use of slides for personal purpose. Please seek permission to reproduce the same in public forms and presentations.
Manu Melwin JoyAssistant Professor
Ilahia School of Management Studies
Kerala, India.Phone – 9744551114
Mail – [email protected]
Gratuity
• Gratuity is a part of salary
that is received by an
employee from his/her
employer in gratitude for the
services offered by the
employee in the company.
Gratuity
• Gratuity is a defined benefit
plan and is one of the many
retirement benefits offered
by the employer to the
employee upon leaving his
job.
Gratuity
• An employee may leave his
job for various reasons, such
as – retirement /
superannuation, for a better
job elsewhere, on being
retrenched or by way of
voluntary retirement.
Gratuity
• Eligibility
– As per Sec 10 (10) of Income
Tax Act, gratuity is paid when
an employee completes 5 or
more years of full time service
with the employer(minimum
240 days a year).
Gratuity
• How does it work?
– An employer may offer
gratuity out of his own
funds or may approach a
life insurer in order to
purchase a group gratuity
plan.
Gratuity• How does it work?– In case the employer chooses
a life insurer, he has to pay annual contributions as decided by the insurer. The employee is also free to make contributions to his gratuity fund. The gratuity will be paid by the insurer based upon the terms of the group gratuity scheme.
Tax treatment of gratuity• The gratuity so received by
the employee is taxable under the head ‘Income from salary’. In case gratuity is received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head ‘Income from other sources’.
Tax treatment of gratuity• For the purpose of
calculation of exempt gratuity, employees may be divided into 3 categories –– (a) Government employees– (b)Non-government
employees covered under the Payment of Gratuity Act, 1972
– (c)Non-government employees not covered under the Payment of Gratuity Act, 1972
Tax treatment of gratuity• n case of government employees
– they are fully exempt from receipt of gratuity.
• In case of non-government employees covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below:– (i) Actual gratuity received;– (ii) Rs 10,00,000;– (iii) 15 days’ salary for each
completed year of service or part thereof
Tax treatment of gratuity• Here, salary = basic + DA +
commission (if it’s a fixed % of sales turnover).
• ‘Completed year of service or part thereof’ means: full time service of > 6 months is considered as 1 completed year of service; < 6 months is ignored.
• Here, number of days in a month is considered as 26. Therefore, 15 days’ salary is arrived as = salary * 15/26
Tax treatment of gratuity• In case of non-government
employees not covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below:
• (i) Actual gratuity received;• (ii) Rs 10,00,000;• (iii) Half-month’s average salary
for each completed year of service (no part thereof)
Tax treatment of gratuity• Here, salary = basic + DA +
commission (if it’s a fixed % of sales turnover).
• Completed year of service (no part thereof) means: full time service of > 1 year is considered as 1 completed year of service. < 1 year is ignored.
• Average salary =10 months’ salary (immediately preceding the month of leaving the job)/10
Tax treatment of gratuity
• Varun had been working with an IT
company since past 10 years, 7
months. He is retiring on 15th April,
2010. His current Basic = Rs 40,000
pm, DA = Rs 5,000 pm. He is going
to receive a gratuity amount of Rs 3
lakhs on retirement. Note: Varun’s
basic and DA have been the same
since past 1 year.
Tax treatment of gratuity• Lets consider 2 situations
here – (a) Varun’s employer is covered under Payment of Gratuity Act, 1972; and (b) Varun’s employer is not covered under Payment of Gratuity Act, 1972.
Tax treatment of gratuity