How to Calculate Gratuity Amount?

Feb 23rd 2024
Fixed Income
What is Gratuity and How to Calculate Gratuity Amount?

A gratuity is a one-time payment made by an employer to a former employee upon their departure. This is just one of the several retirement perks that a company offers to its workers, provided that the worker has worked there continuously for five years. A list of guidelines and regulations about gratuities in India is provided by the Payment of Gratuity Act of 1972.

What is Gratuity?

A gratuity is a payment made by an employer to an employee in recognition of the services the employee provided while they were employed. When an employee meets specific requirements, they will often receive their gratuity when they leave their work or upon retirement.

A person cannot be entitled to receive a gratuity unless they have worked for the organization for a minimum of five years. If an employee passes away or becomes disabled due to an illness or accident, their gratuity will be paid out before their five-year employment is up.

Eligibility Criteria To Get Gratuity

The list of requirements for gratuity eligibility that one must meet to receive a gratuity is as follows: 

  • A worker must have provided their services to a single employer continuously for five years in an organization. 
  • A worker ought to qualify for superannuation 
  • An employee ends their employment 
  • Employee passing away or becoming disabled due to an illness or accident.

Gratuity Payment

The amount of the gratuity is mostly determined by two things. 

  1. Total number of years of service; 
  2. Last salary is drawn; 

When it comes to the precise amount of gratuity that an employee should receive when they retire or leave a firm, there is no defined proportion that the law specifies. Employers have the option of paying more than that amount or using a formula to determine the final result.

Classification of Workers by the 1972 Payment of Gratuity Act 

The Payment of Gratuity Act of 1972 divided workers into two groups to determine the amount of gratuity that would be due to each: 

• Workers covered under the Gratuity Act 

• Workers who are not protected by the Act on Gratuities 

The Payment of Gratuity Act of 1972 applies to all employees of a company if, during the previous 12 months, the organization employed ten or more people on a single day. The organization will always be covered by the act once it falls under its purview, even if it employs less than ten people in total.

Employees working in factories, mines, corporations, ports, plantations, mines, and any other business with more than ten workers are covered under the Payment of Gratuity Act of 1972.

In contrast to the provident fund, the employer pays the full amount of the gratuity; the employee makes no contributions to the fund. The employer has two options for providing gratuities to its staff: either pay the gratuity out of pocket or work with a competent insurance company to set up a group plan. The company will make yearly contributions to the insurance provider as part of the plan. The terms of the group insurance plan determine the gratuity that the insurance company will pay.

What Does a Gratuity Calculator Mean?

Granite calculator is one tool that can assist someone in estimating how much gratuity they will receive after they retire. A person can only be eligible for a gratuity if they have worked for a company for more than five years in a row. With the help of the Online Gratuity Calculator, people may determine the precise amount of gratuity that is owed to them. To determine the amount of gratuity that is owed, an employee must be categorized as either covered or not.

Gratuity Calculation Formula

For workers covered by the Payment of Gratuity Act of 1972 

To calculate the gratuity owed to employees covered by the Gratuity Act, it is necessary to utilize the Gratuity Calculator Formula.

Gratuity Amount = (15 X last drawn salary X period of employment)/ 26 15 days of the last drawn salary for every year of service completed or part of thereof more than 6 months. 

In this case, the last collected salary consists of commission on sales, dearness allowance, and base salary. In this case, 15/26 will stand for the fifteen working days in a month.

For employees who are not covered under the Payment of Gratuity Act of 1972 

Formula to calculate gratuity amount for those who are not covered under the Payment of Gratuity Act. 

Gratuity Amount = (15 X last drawn salary X period of employment)/ 30 

In this case, the gratuity is given by one-half month's pay for each full year of service. Included in the most recent salary draw is commission on sales, dearness allowance, and base salary. In this case, 15/30 refers to the 15 working days in a month. The years of service will be tallied and rounded to the closest whole year.

Tax and Gratuity Calculation

The type of employee receiving the gratuity determines whether it is taxable in the majority of cases. Three categories are used to classify them: 

Government Worker: A tax-free gratuity is available to employees of the government. Any gratuity that a government employee receives—whether from the federal government, a state government, or a local authority—is fully free from income tax. 

Employers protected by the Payment of Gratuity Act include: 

In this instance, the last fifteen days' worth of wages for workers whose employers are protected by the gratuity legislation will be free from income tax.

Workers whose employer is not protected by the 1972 Payment of Gratuity Act: 

In this instance, income tax will only apply to the least of the following: a) the actual gratuity received; b) Rs. 10 lakhs; or c) a half-month's wage for each full year of employment the employee has worked for the employer. 

Note: With effect from March 29, 2018, the Indian government increased the gratuity maximum from Rs 10 lakhs to Rs 20 lakhs in the newly released interim budget of 2019. Employees who work in PSUs and those who are not covered by the Payment of Gratuity Act of 1972 would benefit from the change.

Gratuity Calculation For A Deceased Employee

If an employee passes away, their gratuity will be paid out according to the length of their employment, with a maximum benefit of Rs 20 lakh.

Gratuity Forfeiture

When an employee's employment is terminated due to conduct that constitutes an offense and involves moral turpitude, the gratuity payment may be completely forfeited if the offense is committed during employment. 

Such an employee's employment has been terminated because of their disruptive behavior or any other violent act. 

Promotion To lose an employee, termination orders containing charges proving the employee's culpability for the aforementioned wrongdoing should have been given. In one of the cases, it was decided that an employee's gratuity could not be withheld if no termination order contained any of the aforementioned claims.

Payment of Gratuity Amount

In every company, the employer is required to reimburse their staff for gratuities within 30 days of the employee's invoice. The employer will be required to pay simple interest on the gratuity starting on the date it becomes payable, at a rate not to exceed the federal government's specified rate, if they fail to do so within the allotted 30-day period. The qualifying employees should get their gratuity in cash, via bank check, or by demand draft, at their discretion.

Nomination

You have 30 days from the date of your one-year service completion to create a nomination after completing one. When putting in a nomination, the applicant must name multiple family members; if the applicant names a nominee in the name of someone who is not related to them, that nomination is prohibited. If the nominee passes away before the applicant, the interest rate will be reimbursed to the applicant. In these situations, the candidate ought to submit a fresh nomination according to these interest rates. The application may designate someone under the gratuity by using Form F.

Why an employee doesn’t get the gratuity amount?

The employee does not need to get the gratuity if they are fired for violent or disorderly behavior or other similar offenses. Should an employee conduct any behavior during their work term that would be considered a morally reprehensible offense, the issue of whether or not to pay a gratuity will not come up. The employer is required to pay the employee's gratuity if there isn't a termination order that includes any of the charges above.

The Conclusion

It is doubtful that you will get your gratuity if you decide to quit a company before the five years have passed. Therefore, you must stay with one business and refrain from switching jobs regularly. This would guarantee that you obtain the gratuity payout that is due to you. Additionally, keep in mind that this benefit—basic and dearness allowance included—is mostly dependent on your most recent pay. As such, you should make sure that your other benefits are smaller and your basic and dearness allowance is higher. When you depart the company, this would guarantee a larger gratuity.

FAQs

Q. Who can be eligible for gratuity?

- Gratuities are available to any employees who have worked for the same company continuously for five years. Upon leaving an organization after five years or more of continuous service, the employee will be eligible to receive a gratuity amount.

Q. Is it possible to nominate someone for a gratuity? 

- Yes, it is possible to designate a beneficiary for a gratuity. To do so, fill out Form 'F' when you first join the company.

Q. Are contract or temporary workers qualified to receive gratuities? 

- Indeed, if they are regarded as employees of the company, temporary or contract workers are entitled to a gratuity.

Q. What is the highest benefit amount that an employee may get in the event of their death? 

- In the event of an employee's death, the maximum gratuity benefit amount is limited to Rs 20 lakhs.

Q. What is 15/26 in Gratuity Calculation?

- The ratio 15 / 26 denotes 15 of the 26 working days in a month; that is, an average of 30 days less 4 Sundays is taken into account during computation.

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