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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:·  

    • margin-left:18.0pt;text-align:justify">Rs 20 lakh.
    • margin-left:18.0pt;text-align:justify">The actual amount of gratuity received.
    • margin-left:18.0pt;text-align:justify">The eligible gratuity.
    • For example,
      your employer had paid you a gratuity of Rs 12 lakh. As per the gratuity
      calculation in the earlier example, you are eligible for a gratuity amount of
      Rs 2,59,615. The government has set Rs 20 lakh as the upper tax-free limit. The
      lowest of the three figures is Rs 2,59,615, which is exempt from tax. You must
      pay tax on the remaining amount of Rs 9,40,385 as per your income tax slab.

      Do note that in

      your entire working life, the maximum tax-exempt gratuity amount you may claim,
      cannot go beyond Rs 20 lakh.