Pention And Gratuity

GRATUITY MEANING: • Something given voluntarily or beyond obligation, usually in response to or in anticipation of service. • a gift of money, over and above payment due for service. • a relatively small amount of money given for services rendered.

When are you entitled? • Gratuity in earlier days was rather arbitrary and completely hostage to the whims of the employer. • This led to a lot of discord and finally the government stepped in, passing the Payment of Gratuity Act, 1972, making it mandatory for all employers with more than 10 employees to give them gratuity. • Employees, as defined here, are the ones hired on company payrolls. Trainees are not eligible and gratuity is paid on the basis of the employee's basic plus dearness allowance if any.

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 years put in Wages = Basic salary + DA

CALCULATION: • Take the monthly salary drawn by you last (basic plus dearness allowance) on resignation or retirement and divide it by 26, assuming there are four Sundays in a month. This is your daily salary. • Multiply this amount by 15 days and further with the number 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

• For employees who do not fall under the Gratuity Act,

the amount due for them is : ½ average ten months' salary x number of years of service

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 you more gratuity; but any extra benefit that he pays, not coming under the formula, will be taxable. For instance, in the above example, if the employer pays you Rs 350,000, the entire money is not tax exempt; only the Rs 290,000 due under the formula is.

• Be it a lump sum above the due amount, or money that you 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 entire amount is tax-exempt. • However, if death occurs after the gratuity is due then any amount above Rs 350,000 is taxable. • The employer could also offer you an extra gratuity by deducting a portion of your salary as the cost to the company.

To meet its liabilities towards gratuity, a company either funds the money from its own pocket, or opens a trust and puts in money for the gratuity fund. This fund is then managed either by an insurer or an actuarial company.

PENSION • A pension is an arrangement to provide people with an income when they are no longer earning a regular income 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/or contractual terms. A recipient of a retirement pension is known as a pensioner or retiree. • Pensions should not be confused with  severance packages; the former is paid in regular installments, while the latter is paid in one lump sum.

Benefits: • A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. • Occupational pensions are a form of  deferred compensation, usually advantageous to employee and employer for tax reasons. • Many pensions also contain an insurance aspect, since they often will pay benefits to survivors or disabled beneficiaries, while annuity income insures against the risk of longevity.

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 receive defined benefits upon retirement. • Funding can be provided in other ways, such as from labor unions, government agencies, or selffunded schemes.

Social / state pensions • Many countries have created funds for their citizens and residents to provide income when they retire (or in some cases become disabled). • Typically this requires payments throughout the citizen's working life in order to qualify for benefits later on. For examples, see National Insurance in the UK, or Social Security in the USA.

Disability pensions Some pension plans will provide for members in the event they suffer a disability. This may take the form of early entry into a retirement plan for a disabled member below the normal retirement age.

TAX TREATMENT Case

Particulars

Tax treatment

Case 1

Pension is received from UNO by the employee or his family members

It is not chargeable to tax

Case 2

Family pension received by the family members of armed forces (after the death of the employee) Family pension received by the family members of other cases  (after the death of the employee)

It is exempt under section  10 (19) in some cases.

Case 3

Case 4

It is taxable in the hands of recipients under section 56 under the head “income from other sources”. Standard deduction is available under section 57 which is 1/3 of such pension or Rs. 15000, whichever is lower.

Pension received by an employee Tax treatment depends on (during his lifetime) in any whether Pension is other cases. Commuted or Uncommuted (Refer Below).

• Uncommuted pension whether received by a Govt. or a 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. employee is exempt on following basis:

 Situation

Tax Exemption available

If Gratuity is received

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

If Gratuity is not received

One-half of the pension which he is normally entitled to receive is exempt.

  How much can you get?   The income that you will get from your pension when you retire depends on two main things:  •  The kind of plan you have. •  How long you have been with your company.

What will you get from my  defined benefit pension plan? Before you retire, you will know exactly what you’ll get each month. Your plan administrator can help you figure it out. It may be one of these common types: Final average earnings: This plan bases your pension on how much you made over your last few years with the company. Often it’s the last five years. Some plans take the best five years out of the last 10. The best plans take the best three years out of your last 10.

Career average earnings:  This plan bases your pension on your average income over your years in the plan. For instance, your pension may equal 1.5% of what you earned on average.   Flat benefit plan:  Union workers on short-term contracts often have these plans. Your employer works out with the union how much pension you get for each hour on the job. The money goes into a pension fund where a board of trustees oversees the investments.