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Monday, January 10, 2011

Gratuity: Get Rs 10 lakh for not hopping jobs

How is gratuity calculated
Are you ruing your decision not to change jobs while your peers jumped more than two or three times to land fatter salaries? Don't worry, because patience is not only a virtue but can also be very rewarding in financial terms. If you have completed at least five years of service, you are eligible for a fat lump-sum payment in the form of gratuity when you are finally bidding farewell to a company. Your former colleagues, who changed every two or three years for lucrative new offers, will not be eligible for the same benefit.

Gratuity is one of the oldest employee-retention tool in the basket of HR managers. It used to be one of the three major retiral benefits along with Employees' Provident Fund and pension. The objective was to make it lucrative for an employee to stay in the company in the long term and reap benefits. But unlike the retention bonuses that companies now offer to select employees, gratuity used to be for all employees in a company.

However, gratuity has lost favour over the years because job-hopping has become a norm. "The average employee now changes jobs every 2-4 years," says Kris Lakshmikant, CEO and managing director of Bangalore-based HR firm Head Hunters India.

How much will you get
Besides, patience is in short supply in this era of instant gratification. "Youngsters today are more concerned with cash in hand than what comes to them after 10-20 years. They do not think of long-term benefits and give no significance to benefits such as gratuity," says Lakshmikant.

This can be a costly judgement error. Even with a small hike in your basic salary, your gratuity corpus can assume gigantic proportions over the long term. If someone starts his career at a basic salary of Rs 30,000 and gets a nominal 10% increment every year, his gratuity at the end of 20 years will be Rs 14.1 lakh (see graphic). However, the Payment of Gratuity Act , 1972, places a cap of Rs 10 lakh on the amount that a company has to pay as gratuity, although a company is free to give more if it wants to.

What's more, the tax exemption limit for gratuity has now been raised to Rs 10 lakh (see box), which makes this long-term benefit even more attractive. "You should consider the fact that a lump sum of up to Rs 10 lakh you get is tax-free while the raise in your next salary would be taxable. So when you decide to change jobs and there are only a few months left for entitlement of the gratuity, buy some more time from the new employer so that you are able to avail this benefit," says Veer Sardesai, a Pune-based certified financial planner.

Governed by the Payment of Gratuity Act, 1972, gratuity is a defined benefit plan. It is mandatory for companies with more than 10 employees on their payrolls to give gratuity to an employee on resignation, retirement and termination of service.

However, an employee is eligible for this benefit only on completion of five years of continuous service with the company. Say, you leave after working for three years and rejoin after sometime and work for another two years, you are not entitled to this benefit.
"There should not be any break by the employee from the date of joining to be eligible for the sum, though probation period, any leaves that you have availed and notice period served by you are not counted as breaks," says the HR head of a large corporate house.

But there are exceptions to this rule. The condition of minimum five years of service is relaxed in the case of death or permanent disablement of the employee.

Gratuity is calculated as 15 days' salary for each completed year of service. The salary includes your last drawn basic salary and dearness allowance but excludes all other allowances. For instance, if you have completed seven years of service and the last drawn monthly salary is Rs 45,000, you are entitled to a gratuity of Rs 1.8 lakh.

The gratuity rules are lenient when it comes to calculating the completed years of service. If one has put in more than six months during a year, it shall be treated as one complete year.

How gratuity is taxed

However, the rules are not so lenient for employees who do not fall within the ambit of the Gratuity Act. Their entitlement is based on the average salary of half a month for each completed years of service. Also, any period of more than six months is not considered to be a complete year here. However, if an employer wishes, you can be paid more than the entitlement. Typically, employers manage this liability by creating a trust or outsource this money into the group gratuity scheme of an insurance company.

It's important to note that this benefit is only for those on the company's regular payroll. If you are on a contract, there's no gratuity waiting for you even after 5-10 years of service. However, some organisations do offer employees who are on the payroll of a company but have been hired on contract full benefits if the contract is renewed and they complete the stipulated time frame. Ask your company for details if you are on a contract.

Of late, the gratuity component has found its way into the cost-to-company compensation packages of companies. Some companies offer gratuity to employees even though they may not have put in the required number of years.

Delhi-based telecom engineer Yogendera Kumar was in for a pleasant surprise when he recently switched jobs. "I got gratuity along with my final settlement. Though I had been told that I would be eligible for gratuity, I wasn't sure since the previous two organisations where I worked for a similar tenure didn't pay me any."

For companies, this is a good HR practice that makes them look like a great place to work in. This is especially important at a time when India Inc is struggling to find the right talent. Says an HR professional with a Gurgaon-based telecom company: "We have included the annualised cost of the gratuity in the package, so we pay that up regardless of employee serving us for five years or not."

Curtesy: ET

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