Difference Between Gratuity And Pension

Securing retirement is the goal of most workers, but it is dependent on having enough money. An employer may provide a lump sum payment to a retiring employee as an expression of gratitude for their service when they reach a certain age.

Another retirement benefit that might be provided is a pension plan, in which the retiree or their dependents get a set monthly payment for the rest of their lives. In this article, you are going to learn more about the difference between pensions and gratuities.

Government benefits like retirement pensions and gratuities provide a comfortable retirement or departure for salaried workers. Examine the article as it attempts to clarify the actual differences between a gratuity and a pension.

Retirement vs. Gratuity

Pensions are paid out at the end of an employee's employment, while gratuities are given out at the end of service. The monetary gift may be paid in numerous installments or one large payment. A gratuity, on the other hand, is a one-time payment given to a leaving employee as an expression of gratitude for their time and work done by them during their employment.

Pensions are often granted to former government employees or those who worked for a government-owned business or agency. Pension payments will be paid to qualifying workers after a certain number of years of service. The amount that is provided is usually specified each month.

Meaning of "Gratuity"

When a worker or member of the public contributes value to the company in the form of salary, the company is authorized to pay them a gratuity. Gratuity is a clearly defined compensation that is one of the several retirement perks that the firm offers to its employees upon their exit from the company and their profile.

A worker can leave for several reasons, such as retirement, physical or mental health issues, a better opportunity elsewhere, or discontent with their current role. A termination incentive is available to staff members who have contributed five years or more of full-time labor to the firm.

A firm may use a life insurance provider or use its own cash to pay for a set or group retirement plan. If the company chooses to use a life guarantee or insurance, it will have to pay the insurer yearly payments in the amounts that the guarantor or insurer specifies. Also, the worker is able to add to his fund or gratuity account.

Based on the conditions of the group or combination incentive system, the insurance company will provide the bonus. Employees are required to record their adopted gratuity under the pay category as income. In this instance, gratuity is regarded as "earnings from different origins" and is thus exempt from taxes by the employee's successors or legal heirs.

Meaning of "Pension"

Pensions are not always included in retirement packages, even though many businesses do. Employee pensions are another benefit that many large businesses and governments usually provide to retiring employees. Your employer will make financial contributions to your pension plan if it provides a proposal or pension plan.

Your severance package must include a lump sum payment from the employer to you when you reach a specific age or retirement phase. Your age, the length of time, and the quantity of effort you have put in for the pension-granting firm are taken into account in an annuity calculation.

All pension plans must follow the explicit criteria set out by the Labor Department. These policies specify the annual financial and temporal contributions that the corporation must make to maintain a reserve fund sufficient to provide specified retirement or pension benefits in the future.
Most pension payouts and profits are subject to taxes.

When you begin receiving your pension reimbursements, you will need to disclose whether you expect to pay taxes on them. It is conceivable that a portion of contributions made to a pension plan may be tax-exempt. An employee's pension does not ensure that they won't be let go or terminated. The money you have earned freezes at that point. Certain individuals have not received the promised or assured benefits due to poorly implemented pension plans.

Key Differences Between Pensions and Gratuity:

Now that we know exactly discussed the meaning of pension and Gratuity, let's go on to discuss the fundamental distinctions between pensions and gratuity retirement benefits.

Benefit Characteristics

• Gratuity: Given to an employee by their employer as a one-time payment in gratitude for their lengthy service, a gratuity is a lump sum payment granted to them. It is simply a gesture or form of satisfaction provided to the staff member.
• Pension: In contrast, a pension is a typical, recurring payment that the company makes to a retired employee. It functions as a source of income in retirement and resembles a salary continuation.

Eligibility Criteria:

• Gratuity: The number of years a person has worked for the company determines their eligibility for a gratuity. An employee typically qualifies for a gratuity after working continuously for at least five years.
• Pension: Several circumstances, including the employer's pension plan, affect a person's eligibility for a pension. Certain schemes can include age-related requirements, while others might have a limitation on the number of years of service.

Regularity of Payment

• Gratuity: In the event of retirement, resignation, or death, gratuity is often given as a one-time lump sum payment. This payment is not a recurring one.
• Pension: Pension payments are given to retirees regularly, such as monthly or quarterly, and provide them with a reliable source of income for the remaining years of their lives.

Taxation

• Gratuity: According to the Income Tax Act, gratuities are free from several taxes. A method that takes into account the employee's income, length of service, and other variables is used to determine the exempt amount. It might be taxed on the leftover sum.
• Pension: Income from a pension is taxed based on the taxpayer's income tax category. However, pension income is fully taxed and does not qualify for any special exemptions.

Recipient in the Event of Death

• Gratuity: If an employee passes away, the nominee or their legal heirs usually get the gratuity payment.
• Pension: Depending on the details of the pension plan, the pension may be provided to the employee's surviving spouse or dependant family members after their passing.

Relevance

• Gratuity: If all employees meet the qualifying requirements, gratuities are paid to all workers, including those in the public, private, and government sectors.
• Pensions: The public and commercial sectors may provide different pension plans. Private sector workers may have alternatives like the Employee Provident Fund (EPF) or the National Pension System (NPS), whereas government personnel often have specified pension plans.

Contribution:

• Gratuity: The employer is the major one who makes a gratuity. The worker doesn't contribute anything toward the gratuity.
• Pension: Employees may make contributions to their pension funds under certain circumstances, particularly in defined contribution pension schemes such as the NPS.

Planning for retirement requires knowing these important distinctions between a pension and a gratuity. These two benefits have different functions and affect an employee's retirement savings in different ways.

Difference Table

Is There A Tax On Gratuity in India?

In India, gratuities are taxed, yet there are several exceptions. A gratuity's taxable amount is determined by the following factors:

• If the worker is employed by the government or a private company.
• Is the organization subject to the Payment of Gratuity Act, 1972?
• The duration of the worker's employment;
• the total amount of the gratuity obtained.

The following guidelines generally apply to how gratuities are taxed in India:

• Government personnel are entirely excluded from paying taxes on gratuities they receive.
• Employees in the private sector are entitled to taxable gratuities, with the first Rs. 20 lakh being exempted from tax.
• The extra gratuity amount is taxed if it exceeds Rs. 20 lakh.
• The employee's gratuity is fully taxable if they have worked for the company for less than five years; otherwise, they are only eligible for the exemption of Rs. 20 lakh.
• If the person passes away while still employed, an additional exemption of Rs. 20 lakh is allowed.