Gratuity is the foundation of superannuation funds that an employee expects from their long term employers. While Budget 2020 has proposed caps on the tax-free employer’s contribution to gratuity along with other benefits, we can look at earning decent returns from investing the gratuity amount in lucrative ad risk free investment options.
Gratuity is paid to the employee on certain conditions – resignation, termination, lay-off, retirement, provided the employee has completed at least five years of continuous service. In case due to disablement or death, the five-year rule is given relaxation. As per current income tax laws, gratuity is exempt up to Rs. 20 lakhs in a lifetime for non-government employees. In case of government employees, the entire gratuity amount received is tax-free irrespective of the amount.
To know as an employee what is the gratuity amount you are eligible to receive, please follow one of the gratuity formulas as below. You will have to check with your human resources, under which plan do you fall. Some companies are not mandated by law to give gratuity but can still provide it as part of the CTC.
- Gratuity payment mandated by Law
Gratuity = N*B*(15/26)
Here, ‘N’ is the tenure of service completed in the company and ‘B’ is the last drawn basic salary + dearness allowance. As per the tax laws, the number of working days is assumed to be 26. 15 days is the number of working days on which the calculation is advised for gratuity.
- Gratuity Benefit provided voluntarily by the Organisation
If a company decides to provide gratuity, even if it does not fall under the category of companies to be mandated to provide so, the law provides the following formula for it.
Gratuity = N*B*(15/30)
Here, ‘N’ is the tenure of service completed in the company and ‘B’ is the last drawn basic salary + dearness allowance. As per the tax laws, the number of working days is assumed to be 30 as the benefit of a higher denominator is given.
Investing your Gratuity Amount
Just receiving the gratuity is the first step. You need to look at various investment options which will give the highest returns as per your risk appetite. FD is a great investment option for investing your gratuity amount. While you can be worried about the volatility on equity investments, you also need to keep a check on tax on fixed deposits which you might have to pay with an FD investment. While bank fixed deposits have tax deducted at source, you can get an exemption by filling out Form 15G/H.
If you are earning less than the taxable bracket, you need not pay any TDS. Similarly, company deposits like Bajaj Finance FD are tax exempted up to Rs. 5,000 of interest earning per year. You can seek out a longer duration investment such as 60 months and earn easily up to 7.85% interest if you are a senior citizen.
You can also avail advantages of stable ratings from ICRA and CRISIL on these FDs and periodic interest payouts – monthly, quarterly, bi-annually. High paying company FDs can maximise wealth for your future.