How to Calculate Gratuity, Eligibility & Rules?

Gratuity is an important benefit received by the employee from the employer. It is one type of reward received by an employee for the continuous service rendered to the organisation. But there are certain rules and eligibility criteria for the calculation of Gratuity. In this article, we will understand the same in detail.

What is Gratuity?

Gratuity is a lumpsum amount paid by the employer to his employee for the consistent services offered by the employee. Not everyone gets paid gratuity. It’s paid only to the employees who have worked for at least 5 years in the company. The rules and regulations of gratuity are laid under the Payment of Gratuity Act 1972.

Gratuity can be received by the employee before 5 years also. This happens in case the employee gets disabled due to a disease or accident. The amount an employee receives as gratuity depends on the last drawn salary and total years of service in the company. You can also use the Gratuity Calculator to calculate the gratuity amount

Formula and Calculation of Gratuity?

There is a specific formula used for the calculation of gratuity. This will include inputs like basic salary, dearness allowance, employment years in the company etc. There are two main categories for the calculation of gratuity. Let’s understand each.

  1. For the Employees who under the Payment of Gratuity Act, of 1972

The gratuity formula in this case is as under: –

Gratuity Amount = n×b×15/26

n= the number of years worked in the organisation

b = last drawn salary that includes basic salary and dearness allowance.

Let’s understand this through an example. If you have worked for an organisation for 10 years. And your last drawn salary that includes basic salary and dearness allowance is ₹25000. Then the calculation of the gratuity amount is as under:- 

Gratuity Amount = 10×25000×15/26 = ₹144231

Things to be noted here: –

The upper limit of the gratuity amount in any case cannot be more than ₹20 lakhs. If it is more than that then it is considered as ex-gratia.

In addition to this if you have completed more than six months in the last working year of the organisation then it would be rounded off to the next figure. Suppose if you have worked for 7 years and 8 months in an organisation. Then while calculating the gratuity the tenure will be considered as 8 years.

And if you have served less than six months in the last working year of the organisation then it will be rounded off to the previous figure. Suppose you have worked for 7 years and 3 months in an organisation then the tenure will be considered as 7 years in gratuity calculation.

  1. For the Employees who don’t come under the Payment of Gratuity Act, of 1972

Suppose the organisation for whom you work is not included in the Payment of Gratuity Act. In such cases also the gratuity will be paid to you. But the calculation of gratuity differs a bit here.

The gratuity formula would be as under: –

Gratuity Amount= (15 × last drawn salary × tenure)/30

Let’s understand this through an example. Suppose you have worked for a company for ten years and your last month’s salary was ₹25000 And if the organisation doesn’t fall under the Payment of Gratuity Act. Then gratuity will be calculated as under: –

Gratuity Amount= (15 × 25000 × 10)/30 = ₹125000

What is a Gratuity Calculator?

A gratuity calculator is a tool that can help to calculate the gratuity amount. It gives you a rough estimate of the gratuity amount you are going to receive from the organisation. There are many gratuity calculators available online to calculate gratuity amounts.

The gratuity calculator works on the principle of the gratuity formula. You just need to input the last drawn salary and tenure of service in the calculator. And the calculator will give you the gratuity amount in seconds.

What are the Eligibility Criteria for Gratuity?

Everyone can’t receive gratuity. There are certain criteria for the same. They are as under: –

  1. You shall be eligible for superannuation.
  2. You should have retired from your services.
  3. You should have resigned from the company after working continuously for at least 5 years.
  4. If you pass away then the gratuity is paid to your nominee. In case of disability due to accident or sickness, the gratuity amount is paid to you.

What are the Rules of Gratuity?

There are certain rules for Gratuity. They are as under: –

  1. As per the Payment of Gratuity Act of 1972, an employer can refrain from paying gratuity even if the employee has completed 5 or more years of service. This happens in case the employee has been fired for disorderly behaviour.
  2. Employees need to serve at least 5 years in the organisation without any break to get a gratuity amount.
  3. Those companies who have 10 or more than 10 employees in a single day in the last 12 months can pay gratuity.
  4. An employee who is eligible for gratuity, then he/she needs to apply for the same within 30 days from the date it becomes payable. And in case the date of retirement or superannuation is known then the application can even be made before 30 days.
  5. An employer cannot deny paying gratuity to its employees even during bankruptcy. Even the court order cannot stop an employee from getting gratuity payment
  6. If an employee passes away, then the gratuity that is paid to his/her spouse or legal heir will be exempted from tax.
  7. Gratuity is calculated on the basis of the last drawn salary and the tenure in the company.
  8. The gratuity paid by the organisation under the Payment of Gratuity Act is exempted from tax up to ₹20 lakhs.
  9. The gratuity amount received by the government employee is not liable for the tax.
  10. The employees of the private companies receiving gratuity are also eligible for tax exemption. The amount of their exemption will be the least of the following: –
  • ₹20 Lakhs
  • The actual amount of gratuity received
  • The eligible gratuity

Conclusion

Gratuity is an important reward received by an employee from his employer. The employee will receive the gratuity only if he/she has completed a minimum of 5 years in the company. One can use a gratuity calculator to calculate the gratuity amount.


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