Gratuity - How to calculate it
Introduction
Gratuity is a form of financial benefit given to employees upon completion of their service with an organization. It’s a way to express appreciation for the hard work and dedication of the employee. In India, gratuity is governed by the Payment of Gratuity Act, 1972, which outlines the conditions under which employees are entitled to gratuity, the amount they can receive, and how to calculate it.
Eligibility for Gratuity in India
To be eligible for gratuity under the Payment of Gratuity Act, 1972, employees must have been with the organization for at least five years. This includes:
- Full-time employees
- Part-time employees
- Temporary employees working in various sectors like factories, mines, plantations, and railway companies
However, some employees are not eligible, such as:
- Employees working on a daily wage basis
- Employees working on a piece-rate basis
- Employees working in seasonal establishments
An employee must also meet one of the following criteria to qualify for gratuity:
- Retirement
- Resignation
- Death or permanent disability due to an accident or illness
Calculation of Gratuity in India
The formula for calculating gratuity is:
Gratuity = (15 x Last Drawn Salary x Number of Completed Years of Service) / 26
Where:
- Last Drawn Salary refers to the basic salary and Dearness Allowance (DA) at the time of retirement, resignation, or death.
- Number of Completed Years of Service is rounded to the nearest whole year.
For example, if an employee has a last drawn salary of INR 50,000 per month and has completed 10 years of service:
Gratuity = (15 x 50,000 x 10) / 26 = INR 576,923
It’s important to note that the maximum gratuity that can be paid is INR 20 lakhs (2 million). If the calculated gratuity exceeds this amount, the employee will only receive INR 20 lakhs.
Taxation of Gratuity in India
Gratuity is taxable under the Income Tax Act, 1961, but there are exemptions and deductions available to reduce tax liability.
Exemptions:
- Gratuity is exempt from tax if it is received after the employee has completed five years of service.
- If the employee passes away, the gratuity received by their legal heirs is also exempt from tax.
Deductions:
- Employees can claim a deduction of INR 20 lakhs on the gratuity received from their employer.
- If the employee has received gratuity from multiple employers, the total gratuity amount from all employers is aggregated, and the deduction of INR 20 lakhs applies.
These exemptions and deductions are applicable only if the gratuity is included in the taxable income of the employee.
Gratuity Calculator
A Gratuity Calculator is a useful tool for employees to estimate the gratuity they are entitled to, based on their salary and years of service. Here's how to use it:
Required Information:
- Last Drawn Salary: This includes the basic salary and dearness allowance (DA) that the employee received at the time of resignation, retirement, or death.
- Years of Service: The number of years the employee worked at the organization.
How it Works:
Once the above details are provided, the gratuity calculator applies the formula mentioned earlier to estimate the gratuity. However, it’s important to note that the amount calculated using the tool is an estimate. The actual gratuity amount may differ depending on various factors, including the organization’s policies and legal regulations.
Conclusion
Gratuity is a token of appreciation for employees, given upon their completion of service with an organization. The Payment of Gratuity Act, 1972 ensures that employees receive this benefit under specified conditions. While gratuity is taxable, there are exemptions and deductions available to reduce tax liabilities.
A gratuity calculator can help employees estimate the amount they will receive based on their salary and years of service.
List of Calculators
You can check out a range of calculators to help with your financial planning and gratuity calculation here.