Gratuity is a lump sum payment to an employee when they leave a company. This is one of the many retirement benefits provided by an organisation to its employees after five years of continuous service. The Payment of Gratuity Act of 1972 establishes a set of rules and requirements for gratuity payments in India.
What is a gratuity calculator?
A gratuity calculator is a tool that estimates the amount of gratuity an employee will receive after five years of service with a company. A gratuity formula is used by gratuity calculators to calculate the gratuity amount based on input values such as last drawn monthly income, years (including months) of service with the company, dearness allowance, and so on.
Formula to calculate gratuity
The Payment of Gratuity Act of 1972 establishes the rules and formula for calculating the Gratuity Amount. The Act divides employees into two categories:
- Category 1: Employees covered under the Act
- Category 2: Employees not covered under the Act
The categories listed above apply to both private and public sector employees. However, the pay structure for government employees varies.
- Gratuity is calculated using the number of working days in a month as 26.
- Wages are calculated at a rate of 15 days for gratuity.
How to calculate gratuity?
The gratuity amount can be calculated using the Gratuity Calculator Formula.
G = n*b*15/26
n = The current organization's total number of completed years.
b = the most recent basic monthly salary drawn (plus dearness allowance, the commission received on sales, if any)
Gratuity is calculated using the number of working days in a month as 26.
Wages are calculated at a rate of 15 days for gratuity.
Category 1: Employees covered under the Gratuity Act
The following formula is used to calculate gratuity for employees in this category:
Gratuity (G) = n*b*15/26
The formula is based on a last-drawn salary of 15 days for each year or a portion of a year of service that exceeds six months.
For example, Ms Richa has been with XYZ Pvt. Ltd. for 10 years and 2 months. Her most recent salary is Rs. 200,000. Her total gratuity would be
Gratuity = 2,000,000*10*(15/26) = Rs. 11,56,154
Category 2: Employees not covered under the Gratuity Act
Gratuity is also available to employees who work for organisations that are not covered by the Act. The formula for this category is as follows:
Gratuity (G) = n*b*15/30
For example, Mr Utkarsh has been with XYZ Pvt Ltd. for 5 years and nine months. His recent salary is INR 75,000. The amount of gratuity he is entitled to be:
Gratuity = 75,000*5*(15/30) = Rs. 220,240
The number of years in this category is determined by the number of completed years. Sachin worked for the company for ten years and nine months, but his tenure is counted as 5 years rather than 6.
How to use a Paytm gratuity calculator?
All that is required is to enter the following information to use a Paytm gratuity calculator:
- Salary per month (last drawn basic pay + Dearness Allowance)
- The number of years of service (in years and months, e.g., 10 years, 7 months)
The gratuity calculator computes and calculates the Gratuity Amount after you enter the required information.
How does a Gratuity Calculator help you?
When you meet the eligibility requirements for the Gratuity of:
- Superannuation age
- Five years of service with the current organisation
- Have no other full-time job
The calculators have the following advantages:
- Calculates the correct gratuity value
- Online gratuity calculators save time over manual calculations
- The calculator provides quick results and is free to use.
- The calculator is easily accessible from any location.
- It is beneficial for long-term financial planning
- Online gratuity calculators save time over manual calculations.
What are the gratuity eligibility criteria?
The employee must meet the following requirements to be eligible for gratuity benefits:
- The individual must be superannuation-eligible.
- He or she should not have another full-time job.
- The individual must have resigned from his or her job after 5 years of continuous service.
- He or she must have left the company.
- There is an exception to the five-year rule in the event of the individual's death, disability, or sickness.
What are the gratuity rules?
Employers have the right to forfeit their gratuity payment under the Payment of Gratuity Act of 1972. Gratuity has some rules. Let's go over the Gratuity rules one by one.
- The latest announcement of the Government of India's interim budget for the fiscal year 2019 raises the gratuity ceiling from Rs.10 Lakhs to Rs.20 Lakhs. It will benefit PSU employees and those who are not covered by the Payment of Gratuity Act.
- This upper limit for gratuity amount is increased only for government employees, while the rule for non-government employees remains the same, i.e. the gratuity amount can never exceed Rs.10 Lakhs. Ex-gratia is defined as any excess gratuity.
- If the last six months of one's employment are more than six months, it is rounded up to the next number. For example, if a person's service tenure is 15 years and 7 months, he or she will receive a gratuity of 16 years. However, if it is 15 years and 4 months, he or she will receive a 15-year gratuity.
Taxation rules on gratuity
Following the calculation of gratuity, it is necessary to understand the taxation rules for gratuity. The taxation of gratuities is directly related to the employee type. Employees can be classified into three major groups:
Employees Covered by the Gratuity Payment Act:
Employees whose employers are covered by the Payment of Gratuity Act will have their income tax withheld for the last 15 days.
Employees Not Covered by the Gratuity Payment Act of 1972:
Employees whose employers are not covered by the Payment of Gratuity Act of 1972 will be exempt from income tax on the lesser of the following amounts:
- 10 Lakhs
- Received gratuity amount
- Half-month salary for each year of employment with the company
Where should the lump sum gratuity be invested?
The gratuity lump sum can be invested in the following savings or investment plans.
Fixed deposits: Fixed deposits have long been the best way for Indians to save money. Current FD interest rates range between 5.5% and 7.5%. Additionally, investors can calculate their returns using any of the online FD calculators.
‘Open Paytm Payments Bank Fixed Deposits at amazing interest rates’
Senior Citizens Saving Schemes (SCSS): Senior Citizens Saving Schemes (SCSS) are safe retirement investment plans. It is one of the postal savings plans. Section 80C of the Income Tax Act allows for tax exemption on investments of up to INR 1.5 lakhs. SCSS plans can help with tax savings.
Frequently Asked Questions
Is it necessary for a person to serve five years of continuous service in order to receive a gratuity?
To receive a gratuity, all employees must have 5 years of continuous service. Employees who are disabled, sick, or die do not need to complete five years of service to receive a gratuity from the employer.
When does an employee receive a gratuity?
An employee is entitled to a gratuity upon termination.
- Voluntary Retirement Scheme
- Disability or death
- Resignation or termination
In all of the above cases, except disability or death, the employee must complete a period of 5 years of continuous employment.
Will a person be able to receive a gratuity if they resign from their job after 4.5 years of service?
No, that person will not be eligible for gratuity because he or she should have completed at least 5 years of service. If an employee dies during their employment, their legal nominee or heir is entitled to the gratuity amount, even if the deceased did not complete five years of service. In another case, according to the Madras High Court Rule, if an employee has served 240 days in the company's fifth year of service, he or she is eligible for gratuity benefits.
Is gratuity applicable to contract or temporary employees?
Contractual or temporary employees are eligible for gratuity if the organisation considers them to be employees. They can then request a gratuity.
Is there a nomination facility for gratuity?
Yes, there is a nomination facility for gratuity, and you must fill out Form 'F' when joining the company to nominate the beneficiary.
Can an organisation refuse to pay a gratuity to its employees if it is not financially stable?
Regardless of an organization's financial stability, it is required to pay the gratuity amount to its employees. They cannot use the financial loss as an excuse for refusing to pay the gratuity.
What is the maximum amount of gratuity available in the event of an employee's death?
The maximum gratuity benefit amount payable in the event of an employee's death is Rs 20 lakhs.
Is there a maximum amount of gratuity one can receive?
Yes, regardless of the number of years of service, the amount of gratuity paid by a company cannot exceed Rs 20 lakh.