Gratuity is a lump sum payment made by an employer to the employee in lieu of the services rendered by the employee. It is governed by the Gratuity Payment Act of 1972
As per the Payment of Gratuity Act 1972 Gratuity shall be payable to an employee on the termination of employment after the employee has rendered continuous service for not less than five years on Retirement or Resignation, except for Payment of Gratuity due to the demise of an employee.
Creation of Gratuity Component
Two Gratuity components must be created:
- one to capture the gratuity amount in salary master as Part of CTC and
- the other is to pay out the gratuity amount during the payment of the final settlement to the resigned employees.
Gratuity as part of CTC:
Go to Settings >> Salary Components and click on the “New” button.
Update the component name as “Gratuity Master” and even the abbreviation as “MGRATUITY”.
Do not check the box “Paid Component” as it is not a paid component.
The pay Type needs to be Earnings.
Keep it Non-Taxable.
The calculation Type needs to be “Formula” and update the relevant formula.
The general Formula is:
“(Basic*4.81%)”
Do not select anything under Mapping.
The Round-off value can be “Nearest to One Rupee”.
This is a Fixed component.
Select Part of CTC check box
Do not check the box “Is an FFS Component”.
Do not check the box” Payable if full month LOP”.
Check the box “Active”.
Click “Save”.
Note: To provide Tax exemption for resigned employees, the “IT Mapping" must be done.
Please click “How to Map Tax Exemption Components” for more details
Gratuity Pay-out as part of the Final Settlement process
Click Settings >> Salary Components and click “New”.
Update the component name as “Gratuity” and even the abbreviation as “GRATUITY”.
Check the “Paid Component” box.
The pay Type needs to be Earnings.
It should be “Taxable”, but NOT “Distributed across the year”.
The calculation Type needs to be “Formula” and update the relevant formula which is generally:
(Basic + DA) *15/26*No of completed years of Service.
(Basic + DA) means the Last Drawn Basic and DA
Map this to the Gratuity component
Round-off value to be “Nearest to One Rupee”.
This is a Variable component.
Check the box “Is an FFS Component”,
Check the box “Active”.
Click “Save”.
Once created and configured as above, the components need to be allocated to all Employees.
For more details on how to allocate a component, please click here.
`