8/14/2019 Pention and Gratuity

1/19

8/14/2019 Pention and Gratuity

2/19

GRATUITYMEANING: Something given voluntarily or beyond obligation,

usually in response to or in anticipation of service.

a gift of money, over and above payment due forservice.

a relatively small amount of money given forservices rendered.

8/14/2019 Pention and Gratuity

3/19

When are you entitled? ratuity in ear ier ays was rat er ar itrary ancompletely hostage to the whims of the employer.

This led to a lot of discord and finally thegovernment stepped in, passing the Payment ofGratuity Act, 1972, making it mandatory for allemployers with more than 10 employees to givethem gratuity.

Employees, as defined here, are the ones hired oncompany payrolls. Trainees are not eligible and

gratuity is paid on the basis of the employee'sbasic plus dearness allowance if any.

8/14/2019 Pention and Gratuity

4/19

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 yearsput in

Wages = Basic salary + DA

8/14/2019 Pention and Gratuity

5/19

CALCULATION:

Take the monthly salary drawn by you last (basic plusdearness allowance) on resignation or retirement anddivide it by 26, assuming there are four Sundays in amonth. This is your daily salary.

Multiply this amount by 15 days and further with thenumber 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

8/14/2019 Pention and Gratuity

6/19

For employees who do not fall under the Gratuity Act,

the amount due for them is :

average ten months'salary x

number of years of service

8/14/2019 Pention and Gratuity

7/19

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 youmore gratuity; but any extra benefit that he pays, notcoming under the formula, will be taxable.

For instance, in the above example, if the employerpays you Rs 350,000, the entire money is not taxexempt; only the Rs 290,000 due under the formula is.

8/14/2019 Pention and Gratuity

8/19

Be it a lump sum above the due amount, or money thatyou 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 entireamount is tax-exempt.

However, if death occurs after the gratuity is duethen any amount above Rs 350,000 is taxable.

The employer could also offer you an extra gratuityby deducting a portion of your salary as the cost to

the company.

8/14/2019 Pention and Gratuity

9/19

8/14/2019 Pention and Gratuity

10/19

PENSION

A pension is an arrangement to provide people withan income when they are no longer earning a regularincome 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/orcontractual terms. A recipient of a retirementpension is known as a pensioneror retiree.

Pensions should not be confused withseverance packages; the former is paid in regularinstallments, while the latter is paid in one lumpsum.

http://en.wikipedia.org/wiki/Pensionerhttp://en.wikipedia.org/wiki/Severance_payhttp://en.wikipedia.org/wiki/Severance_payhttp://en.wikipedia.org/wiki/Pensioner

8/14/2019 Pention and Gratuity

11/19

8/14/2019 Pention and Gratuity

12/19

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 receivedefined benefits upon retirement.

Funding can be provided in other ways, such asfrom labor unions, government agencies, or self-

funded schemes.

8/14/2019 Pention and Gratuity

13/19

Social / state pensions Many countries have created funds for their

citizens and residents to provide income whenthey retire (or in some cases become disabled).

Typically this requires payments throughout thecitizen's working life in order to qualify forbenefits later on.

For examples, see National Insurance in the UK,or Social Security in the USA.

http://en.wikipedia.org/wiki/National_Insurancehttp://en.wikipedia.org/wiki/Social_Security_(United_States)http://en.wikipedia.org/wiki/Social_Security_(United_States)http://en.wikipedia.org/wiki/National_Insurance

8/14/2019 Pention and Gratuity

14/19

8/14/2019 Pention and Gratuity

15/19

TAX TREATMENT

Tax treatment depends onwhether Pension is

Commuted or Uncommuted(Refer Below).

Pension received by an employee(during his lifetime) in any

other cases.

Case

4

It is taxable in the handsof recipients under section56 under the head incomefrom other sources.Standard deduction isavailable under section 57which is 1/3 of such pensionor Rs. 15000, whichever islower.

Family pension received by thefamily members of othercases (after the death of theemployee)

Case3

It is exempt under section10 (19) in some cases.

Family pension received by thefamily members of armedforces (after the death of theemployee)

Case

2

It is not chargeable to taxPension is received from UNOby the employee or his familymembers

Case

1

Tax treatmentParticularsCase

http://www.indiataxes.com/Information/incometax/contents/incomefromos/incometaxation/income_fam_pen.htmhttp://www.indiataxes.com/Information/incometax/contents/exemptincome/exempt_income.htmhttp://www.indiataxes.com/Information/incometax/contents/incomefromos/incometaxation/income_fam_pen.htmhttp://www.indiataxes.com/Information/incometax/contents/incomefromos/incometaxation/income_fam_pen.htmhttp://www.indiataxes.com/Information/incometax/contents/exemptincome/exempt_income.htmhttp://www.indiataxes.com/Information/incometax/contents/incomefromos/incometaxation/income_fam_pen.htm

8/14/2019 Pention and Gratuity

16/19

Uncommuted pension whether received by a Govt. ora 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. employeeis exempt on following basis:

One-half of the pension whichhe is normally entitled toreceive is exempt.

If Gratuity is not received

One-third of the pension,which he is normally entitledto receive, is exempt.

If Gratuity is received

Tax Exemption availableSituation

8/14/2019 Pention and Gratuity

17/19

How much can you get?

The income that you will get from your pension whenyou retire depends on two main things:

The kind of plan you have.

How long you have been with your company.

http://www.investored.ca/glossary/definition/Pages/pension.aspxhttp://www.investored.ca/glossary/definition/Pages/pension.aspx

8/14/2019 Pention and Gratuity

18/19

What will you get from mydefined benefit pension plan?

Before you retire, you will know exactly what youll geteach month. Your plan administrator can help youfigure it out. It may be one of these common types:

Final average earnings:

This plan bases your pension on how much you madeover your last few years with the company. Often its

the last five years. Some plans take the best fiveyears out of the last 10. The best plans take the bestthree years out of your last 10.

http://www.investored.ca/glossary/definition/Pages/defined-benefit-db-pension-plan.aspxhttp://www.investored.ca/glossary/definition/Pages/defined-benefit-db-pension-plan.aspx

8/14/2019 Pention and Gratuity

19/19

Career average earnings:

This plan bases your pension on your average incomeover your years in the plan. For instance, your

pension may equal 1.5% of what you earned onaverage.

Flat benefit plan:

Union workers on short-term contracts often havethese plans. Your employer works out with the unionhow much pension you get for each hour on the job.The money goes into a pension fund where a boardof trustees oversees the investments.

http://www.investored.ca/glossary/definition/Pages/pension-fund.aspxhttp://www.investored.ca/glossary/definition/Pages/trust.aspxhttp://www.investored.ca/glossary/definition/Pages/trust.aspxhttp://www.investored.ca/glossary/definition/Pages/pension-fund.aspx