GRATUITY POWER

This is no personal finance hidden secret, but very few salaried employees are taking advantage of this super power to earn lakhs of tax free income. 

You just need to have a long term mindset and be reasonably good/diligent in performing the day-to-day job at your work place.

This super power is called "Gratuity". 

Under the Payment of Gratuity Act, 1972, employers pay gratuity to their employees at the end of their service as a token of appreciation as long as they have served the company for 5 years or more (technically become eligible after 4 years and 6 months).

Gratuity is calculated as N*B*(15/26)

N = Number of years of service

B = Last drawn Basic+DA monthly salary

How to calculate N?

N is rounded off to the nearest whole number. If you've served 7 years 3 months, then N=7 and if you've served 7 years 8 months, then N=8.

Now, let me take a simple example of how much tax free money salaried employees can get via this super power.

Let's say there is a young professional Rahul who's done his graduation or post graduation from a good college/institute. Rahul is beginning his career with company ABC Private Ltd. at a monthly income of ₹60,000 with 50% of income being Basic Salary (as per New Wage Code 2022).

Rahul is a reasonably bright employee who meets his employer's expectations and gets promoted every 3 years like his peers. Every time Rahul gets promoted, he gets a 25% increment and in other years he gets a 10% increment. 

So if Rahul were to stay at this company for 10 years, Rahul would be eligible for a gratuity of ₹6 lakhs, actually equivalent to ₹9 lakhs of income at Rahul's current income tax bracket.  

Refer to the image below to understand how Rahul's gratuity gets calculated each year.

Now let me truly turbocharge this "super power". 

Rahul's company ABC Private Ltd. allows employees to structure their compensation. Rahul being a smart chap who's living in his parents or grand parents house (so he has no home loan or rent to pay), allocates 100% of his income to Basic Salary. 

Suddenly, Rahul's gratuity has doubled to ₹12 lakhs, equivalent to ₹18 lakhs of tax paid income. And Rahul could have made this change in salary re-structuring at any point in his 10 year service period. 

Sounds too good to be true? 

I'm sharing a snapshot of a real salary slip amongst my acquaintances who has actually allocated 100% of salary as Basic Pay, and that person has been working for the employer for 10 years. 

Now that person is eligible for a tax free gratuity of ₹15 lakhs as a parting gift from the employer. 

Gratuity is a true super power which can be leveraged by almost everyone. 

PS: There will always be exceptional individuals who do much better in life by switching companies every 2-3 years. However, those individuals will likely be exceptions in less than 10% category who did better by switching. Also take into account, the additional effort an individual needs to make to establish his credibility and reputation every time they switch to a new employer. Loyal employees can use all that time and energy for pursuing many other financially and non financially rewarding activities.