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What is Gratuity in my Salary? Why is it Deducted?

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Learn about gratuity which is deducted from your salary, and find out about its purpose.

I'm a 22-year-old software engineer working in India at a small startup. I recently received my first salary slip and noticed that there is a deduction for gratuity. I'm not sure what gratuity is or why it's deducted from my salary. Can you please explain?

Also, I'm planning to leave my job in a year to pursue higher education abroad. Can I still claim my gratuity?

– Simran Kaur (Punjab)

We're happy to help. A lot of youngsters are confused about gratuity so let us explain. Gratuity is a lump-sum payment that an employer is required to pay to an employee who has completed five years of continuous service and is leaving the company. It is a way of rewarding employees for their long-term service and dedication.

Gratuity is calculated taking into account the employee's last drawn salary and the number of years of service. The formula is:

Gratuity = (Last drawn salary * 15 * Number of years of service) / 26
For example, if your last drawn salary is ₹50,000 and you have completed five years of service, your gratuity would be ₹1,44,230.

Gratuity is deducted from your salary every month and deposited into a gratuity fund. This fund is managed by a trustee, who is usually a senior employee of the company. The gratuity fund is used to pay gratuity to employees when they leave the company.

Can you claim gratuity even if you leave your job before completing five years?

There are a few cases where an employee is eligible for gratuity even if they have not completed five years of service. These cases include:

  • Death of the employee
  • Permanent disability of the employee
  • Retirement of the employee
  • Closure of the company

Gratuity is a taxable benefit, so you will have to pay income tax on it when you receive it. However, there is an exemption for gratuity up to ₹20 lakh for government employees and ₹10 lakh for non-government employees.

In addition, if you leave your job to pursue higher education abroad, you may be eligible for gratuity if your employment contract provides for it.

If you are planning to leave your job before completing five years, it is important to check your employment contract or agreement and company policies to see if you are eligible for gratuity. If you are unsure, you can always speak to your HR department.