Introduction

Gratuity is a form of financial benefit that is given to employees upon the completion of their service in an organization. It is a way of expressing appreciation and gratitude for the hard work and dedication of the employee towards their job. In India, gratuity is regulated by the Payment of Gratuity Act, 1972, which specifies the conditions under which an employee is entitled to receive gratuity, the amount of gratuity that can be paid, and the process for calculating and paying gratuity.

Eligibility for Gratuity in India

According to the Payment of Gratuity Act, 1972, an employee is eligible to receive gratuity if they have been employed with an organization for at least five years. This includes full-time, part-time, and temporary employees who are working in factories, mines, oilfields, plantations, ports, railway companies, shops, and other establishments. However, there are some exceptions to this rule, such as:

• Employees who are working on a daily wage basis
• Employees who are working on a piece-rate basis
• Employees who are working in seasonal establishments

In addition to the above eligibility criteria, an employee must also meet one of the following conditions in order to receive gratuity:

• The employee has retired from service
• The employee has resigned from the organization
• The employee has died or become disabled due to an accident or illness

Calculation of Gratuity in India

The amount of gratuity that an employee is entitled to receive is calculated based on the following formula:

Gratuity = (15 x Last Drawn Salary x Number of Completed Years of Service) / 26

In this formula, the "Last Drawn Salary" refers to the basic salary and dearness allowance (DA) that the employee was receiving at the time of their retirement, resignation, or death. The "Number of Completed Years of Service" refers to the number of years that the employee has worked for the organization, rounded off to the nearest year.

For example, if an employee has a last drawn salary of INR 50,000 per month and has completed 10 years of service in the organization, their gratuity would be calculated as follows:

Gratuity = (15 x 50,000 x 10) / 26 = INR 576,923

It is important to note that the maximum amount of gratuity that can be paid to an employee is INR 20 lakhs (2 million). If the gratuity calculated using the above formula exceeds this amount, the employee will only be eligible to receive INR 20 lakhs.

Taxation of Gratuity in India

Gratuity received by an employee is taxable under the Income Tax Act, 1961. However, there are certain exemptions and deductions available that can reduce the tax liability on gratuity.

Exemptions:

• Gratuity received by an employee is exempt from tax if it is received on or after the employee has completed five years of service in the organization.
• Gratuity received by the legal heirs of an employee who has died is also exempt from tax.

Deductions:

• An employee can claim a deduction of INR 20 lakhs from their taxable income if they have received gratuity from their employer.
• If the employee has received gratuity from more than one employer, the total amount of gratuity received from all employers is aggregated and a deduction of INR 20 lakhs is allowed.

It is important to note that the above exemptions and deductions are subject to certain conditions and are applicable only if the gratuity received by the employee is included in their taxable income.

Gratuity Calculator

A gratuity calculator is a tool that can help employees estimate the amount of gratuity that they are entitled to receive based on their salary and years of service. There are several online gratuity calculators available that allow users to input their salary and years of service and receive an estimate of the gratuity they can expect to receive.

To use a gratuity calculator, the employee needs to provide the following information:

Last Drawn Salary: The basic salary and dearness allowance (DA) that the employee was receiving at the time of their retirement, resignation, or death. Years of Service: The number of years that the employee has worked for the organization.

Based on this information, the gratuity calculator will use the formula mentioned above to estimate the gratuity that the employee is entitled to receive. It is important to note that the gratuity calculated using a gratuity calculator is only an estimate and the actual amount of gratuity that an employee receives may differ based on various factors such as the organization's policies, the employee's job role, and the applicable laws.

Conclusion

Gratuity is a financial benefit that is given to employees in recognition of their service and dedication to the organization. In India, gratuity is regulated by the Payment of Gratuity Act, 1972, which specifies the conditions under which an employee is entitled to receive gratuity, the amount of gratuity that can be paid, and the process for calculating and paying gratuity. Gratuity received by an employee is taxable under the Income Tax Act, 1961, but there are certain exemptions and deductions available that can reduce the tax liability on gratuity. A gratuity calculator is a tool that can help employees estimate the amount of gratuity they are entitled to receive based on their salary and years of service.

List of Calculators

One can check out the entire set of calculators here