When an employee leaves his job after putting in a substantial number of years at the same organisation,he becomes eligible for a lump sum payment made by the employer as a mark of recognition for his services. The amount paid to the employee depends on the number of years of service he has put in at the organisation and is known as Gratuity. Earlier,it was not compulsory for an employer to reward his employee at the time of his retirement or resignation. But in 1972 the government passed the Payment of Gratuity Act that made it mandatory for all employers with more than 10 employees to pay gratuity. Eligibility criteria Gratuity is payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years. The payment is made at the time of his superannuation,resignation,or on his death or disablement due to accident or disease. The completion of five years of continuous service is not essential where the termination of service is due to death or disablement. According to Tarun Chugh,chief-alternate distribution,ICICI Prudential Life,"The employer can choose to improve the benefit by offering gratuity even to employees who have completed three or two years of service. An employer cannot claim that gratuity is only for employees completing six years of service." Here employees are defined as those hired on the company's payroll. Trainees and interns are not eligible for this compensation. Calculating gratuity As per the Act,the gratuity amount is 15 days' wage multiplied by the number of years put in by you. Here wage refers to basic salary plus dearness allowance. Take the monthly salary drawn by you last (basic + dearness allowance) at the time of resignation or retirement. Divide this by 26. This gives you your daily salary. Multiply this amount by 15 days,and further by the number of years of service you have put in. If you have put in 10 years and seven months in an organisation,your service period will be taken to be 11 years. But if your service tenure is 10 years and five months,then for the purpose of this calculation your tenure will be taken to be 10 years only. Take an example. Suppose that your average monthly salary is Rs 26,000. Your daily salary will be Rs 1,000. Multiply this by 15 and then by 10. The gratuity you are entitled to after 10 years of service will be Rs 1.5 lakh. For non-government employees,who are not covered under this Act,the manner of calculating gratuity is different. First,the average salary is calculated: for this the average of last ten months' salary is taken (this will include the basic plus dearness allowance plus commission as a percentage of turnover achieved by the employee). Divide this average salary by 30 (ignore fractions). Now,multiply this amount by 15 and further with the number of years of service put in. Dividing the daily salary by 30 instead of 26 does put those not covered by the Gratuity Act at a disadvantage. Tax treatment of gratuity Under the Gratuity Act,1972,gratuity up to Rs 3.5 lakh is tax exempt. Any amount above this level is taxable. Also,if your employer voluntarily chooses to pay you extra gratuity,the extra amount will be taxable. Let's say that the amount due to you is Rs 1.5 lakh and your employer chooses to pay you Rs 2 lakh as reward. In that case,the extra amount of Rs 50,000 will be taxable. However,for employees of central or a state government,a local authority or a statutory corporation,any amount is non-taxable. Gratuity payment to a widow or other legal heirs of an employee who dies in active service is also exempt from income tax. In case gratuity was received in a previous job as well and exemption was allowed towards it,the exemption allowed the next time gets reduced to the extent of exemption already allowed,the overall limit being Rs 3.5 lakh. For example,suppose that when you resigned from your last job you received a gratuity of Rs 1.5 lakh. And now,when you are retiring from another job after spending more than five years,you are getting Rs 3 lakh. It means that the total gratuity received by you is Rs 4.5 lakh (1.5+3). You will be allowed exemption during your lifetime of Rs 3.5 lakh. Any amount above this limit,Rs 1 lakh in this case,will be taxed. To meet its liabilities towards gratuity,a company usually opens a trust and invests money in the gratuity fund. This fund is managed by an insurer or an actuarial company. Insurers also offer a life insurance cover in group gratuity policies. This could either be a standard cover for all employees or could vary across levels. "The employer has the option to avail of a life cover that could be either a flat cover or a graded cover,subject to a minimum of Rs 1,000 per person," says Chugh. Clear guidelines regarding how gratuity money can be invested exist. Insurers may invest the money in either a traditional plan or in a unit-linked plan. While a unit-linked plan is tilted more towards equity,a traditional plan has little exposure to equities. Investing your gratuity money When you receive gratuity money,it becomes part of the overall corpus available to you post retirement. Since it is a one-time reward and not a permanent income stream,it should be used wisely. According to Vishal Dhawan,a Mumbai-based financial planner,"A good idea would be to use this money to create an emergency fund,in case you have made no provision for medical and other contingencies. Next,use this money to pay off outstanding loans,if any. Rest of the money should be parked in various investment instruments in accordance with your risk appetite." Dhawan further adds: "Get an idea of what your overall cash flow will be post retirement and what you will require to meet your household expenditure. For instance,if your monthly expenditure is Rs 25,000 and your pension amount is Rs 5,000,then you will need your other sources to yield Rs 20,000. For this you need to invest smartly." Young individuals. Young investors who have received gratuity on resigning could opt for long-term investment options as they can put the money away for a longer term. Hence,they could invest in a combination of an index fund and Public Provident Fund (PPF). Instead of an index fund,they could also invest in a diversified equity fund that enjoys a good rating (from one of the mutual fund rating agencies like Valueresearch,Crisil,or Icraonline). Risk-averse investors. Investors with a lower risk appetite should safely park their money in a PPF account. However,as per regulations,in one financial year you are allowed to park a maximum of Rs 70,000 per family member in your PPF account. So,if the amount you have received is large,you should look at debt mutual funds and the post office's small saving instruments as well. The retired. Those requiring a regular income post retirement could invest the money in an immediate annuity product from a life insurance company,monthly income plans (MIPs) of mutual funds,Post Office Monthly Income Scheme (POMIS),Senior Citizens' Savings Scheme,and fixed deposits that mature at regular intervals. Gratuity schemes serve as social security instruments. Their significance in a developing country like India cannot be over-emphasised. So,at the time of joining an organisation,do ask your prospective employer about his gratuity policy. •
