What is Gratuity?
Gratuity refers to the amount that an employer pays his employee, in return for services offered by him to the company. However, only those employees who have been employed by the company for five years or more are given the gratuity amount. It is governed by the Payment of Gratuity Act, 1972.
The employee can get the gratuity before five years if he/she gets disabled in an accident or due to a disease. Gratuity mainly depends on your last drawn salary and the years of service which are rendered to the Company.
What are the Eligibility Criteria for Payment of Gratuity?
To receive the gratuity, you must meet the following eligibility criteria:
- You should be eligible for superannuation.
- You should have retired from service.
- You should have resigned after continuous employment of five years with the company.
- In case of your death the gratuity is paid to the nominee, or to you on disablement on account of a sickness or an accident.
What is a Gratuity Calculator?
The Gratuity Calculator would calculate the gratuity amount based on the formula for calculating the gratuity.
Gratuity Formula:
(15 * your last drawn salary * tenure of working) / 26.
A gratuity calculator is a tool which gives you an estimate of the amount that you would receive, on quitting the job, after rendering a continuous five years of service. It is a handy tool to calculate the gratuity on retirement from the company.
You must enter the inputs of the last drawn salary and the tenure of continuous service with the company. The last drawn salary includes your basic salary, the dearness allowance, and the commission that you have received from sales.
The gratuity calculator would show you the gratuity figure in seconds. It is simple to use and can be used any number of times.
Gratuity Calculation – What is the Formula for Calculating the Gratuity?
The amount of gratuity for employees whose employer is covered under the Gratuity Act can be calculated using the formula:
Gratuity = n*b*15 / 26
Where
n = Tenure of service completed in the company
b = Last drawn basic salary + dearness allowance
For example, you have worked with the XYZ company for a period of 15 years. Your last drawn basic salary along with dearness allowance was Rs 30,000. Hence:
The amount of gratuity = 15 * 30,000 * 15 / 26 = Rs 2,59,615
Two points must be noted here:
As per the Gratuity Act, the amount of gratuity cannot be more than Rs 20 lakh. Any excesses would be treated as ex-gratia.
If the number of years you have worked in the last year of employment is more than six months, then it will be rounded to the nearest figure. Suppose your tenure of service is 16 years 7 months, then you receive the gratuity for 17 years. Otherwise, it’s for 16 years if it happens to be 16 years 4 months.
For employees whose employer is not covered under the Gratuity Act, the gratuity amount would be calculated as per the half-month salary on each completed year of service.
The formula is: (15 * Your last drawn salary * the working tenure) / 30.
For example, you have a basic salary of Rs 30,000. You have rendered continuous service of 7 years and the employer is not covered under the Gratuity Act.
Gratuity Amount = (15 * 30,000 * 7) / 30 = Rs 1,05,000.
What are the Taxation Rules for Gratuity?
The tax treatment of the gratuity amount depends on the type of employee who has to receive the gratuity.
The amount of gratuity received by any government employee (whether central/state/local authority) is exempt from the income tax.
Any other eligible private employee whose employer is covered under the Payment of Gratuity Act. Here, the least of the following three amounts will be exempt from income tax:·
- Rs 20 lakh.
- The actual amount of gratuity received.
- The eligible gratuity.
Do note that in your entire working life, the maximum tax-exempt gratuity amount you may claim, cannot go beyond Rs 20 lakh.