How to Calculate Gratuity Amount

A gratuity is defined as a reward employees are given under the Payment of Gratuity Act of 1972. An employee receives this financial prize from their employer as a token of gratitude for their services to the business. This is why it is so important for employees to learn how to calculate gratuities in CTC. In general words, it is a percentage of an employee's pay. However, there is no set percentage of the gratuity that can be given. The company provides the entire gratuity. The employee makes no payment, unlike the provident fund. The amount of money which is owed to employees of a company is managed by the Payment of Gratuity Act of 1972. It controls how much money an employee of a company is entitled to. It is critical to comprehend an employee's eligibility and the amount of gratuity they will receive. In this article, we will explain the process for the calculation of gratuity in detail.

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Table of content

What is Gratuity?

Eligibility for Gratuity Payment

How to Calculate Gratuity Amount

What is a Gratuity Calculator?

Gratuity Amount Investment Options

Conclusion Most Asked Questions

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What is Gratuity?

A gratuity is the sum of money paid by an employer to an employee in exchange for the services the employee provides to the business. However, the gratuity sum is only given to employees who have worked for the company for at least five years or longer. The Payment of Gratuity Act of 1972 governs it. If there is an accident or illness, the employee is eligible to obtain the gratuity prior to the five-year mark. Your most recent income and the number of years you have been employed with the organisation are the primary determinants of your gratuity.

Eligibility for Gratuity Payment

You must fulfil the following requirements in order to be eligible for the gratuity:

• You need to qualify for superannuation benefits.

• You should have left the military.

• After working for the organisation consecutively for five years, you have to leave.

• The gratuity is obtained by the nominee in the event of your death or to you if you become disabled as a result of an illness or accident.

How to Calculate Gratuity Amount

The formula: Gratuity = n*b*15 / 26 can be used to determine the amount of gratuity for workers whose employers are covered by the Gratuity Act.

• n is the length of time spent working for the organisation

  
  

• b is the most recent minimum salary along with dearness allowance.

For instance, you have been working for MNO for fifteen years. Rs 30,000 was your most recent drawn basic wage plus dearness allowance. Therefore, the total amount of gratuity is Rs 2,59,615 (15 * 30,000 * 15 / 26).

Here, two things need to be mentioned:

• The Gratuity Act states that a gratuity cannot exceed beyond Rs 20 lakh. Excessive behaviour would be considered ex-gratia.

  
  

• The number of years you worked in your most recent job will be rounded to the closest number if it exceeds six months. You will get the gratuity for 17 years if your tenure is 16 years and 7 months. Otherwise, if it is 16 years and 4 months, it is only for 16 years.

The gratuity amount for workers whose employer is exempt from the Gratuity Act isdetermined by taking the half-month wage for each year of service that has been completed. The calculation is stated as follows: (15 * your most recent income * the length of employment) / 30. For instance, your base pay is Rs 30,000. Despite your seven years of continuous tenure, the employer is exempt from the Gratuity Act. The amount of the gratuity is 15 * 30,000 * 7 / 30 = Rs 1,05,000.

Gratuity Calculation for Private-Sector Employees 

Gratuities must be paid to all employees by any employer, whether in the public or private sector, with 10 or more workers. It is a financial reward for working for the business. It is part of a post-retirement plan and is considered as a retirement benefit.

Use the following formula to calculate gratuities in CTC amounts.

Gratuity= AB15/26.

• A represents years of service with a company

• B represents the most recent salary

• 15 represents wages for 15 days

• 26 represents the number of days in a month

The base wage, dearness allowance, and sales commission are all included in the most recent salary that was received. A gratuity of up to Rs. 20 lakhs, or 16 times the base income, is due upon retirement. A maximum benefit of Rs. 20 lakhs is given as a gratuity in the event of an employee's death, and it is determined by the length of service. If someone passes away, the following gratuity will be given. After 10 years of employment at ABC Firm, Mr. X's most recent Basic Dearness Allowance (BDA) was Rs. 30,000. Therefore, the amount of Mr. X's gratuity would be 10 x 30,000 x 15/26 = Rs. 1,73,076. The amount of gratuity is determined by the total number of years that Mr. X has worked for the organisation and the last income that he got.

Calculation of Gratuity in Case of Death of an Employee

According to the Payment of Gratuity Act of 1972, if an employee dies before completing five years of continuous employment, the gratuity amount is still owed.

• Beneficiary or Legal Heirs: The employee will receive the gratuity if they appointed a nominee. The money will be distributed to the legal heirs in line with the relevant succession laws if there is no nominee.

  
  

• Work-Related Deaths: The five-year service requirement may be removed if the employee's death results from an illness or accident that was directly related to their job. In these situations, the nominee or legal heirs are still eligible to receive the full gratuity sum even if the employee has not completed the required five years of service.

  
  

• Employer's Choice: Even if an employee hasn't fulfilled the five-year minimum service requirement, businesses may nevertheless decide to pay the gratuity as a courtesy or in accordance with corporate policy.

Depending on the employment contract and corporate policy, the precise handling of gratuities in the event of a death before five years may vary. In order to fully comprehend the ramifications and make sure that the relevant laws are observed, it is advised that the family or legal heirs obtain legal counsel. Depending on the duration of service, gratuity payouts are calculated in the event of an employee's death. Nevertheless, the amount can't exceed Rs. 20 lakh.

What is a Gratuity Calculator?

The Gratuity Calculator would figure out the gratuity amount using the method for calculating gratuities. A tool that gives you an idea of how much you might receive when you leave your job after five years of continuous service is a gratuity calculator. It is a helpful tool for calculating the retirement gratuity paid by the firm. The last pay that was paid and the length of time that you have been employed by the company continuously must be entered. Your base pay, dearness allowance, and commission from sales are all included in your most recent compensation. You would see the tip amount in a few seconds thanks to the gratuity calculator. It is easy to use and has an infinite number of uses.

Taxation Rules for Gratuity

The sort of employee who must receive the gratuity determines how the sum is treated tax-wise.

All government workers are exempt from paying income taxes on their gratuities, regardless of whether they are employed by the federal, state, or local governments.

Any additional qualified private worker whose company is protected by the Payment of Gratuity Act. In this case, the lowest of the three sums listed below will not be subject to income tax:

• Twenty lakh rupees.

• The precise amount of the gratuity that was given.

• The appropriate gratuity.

For example, your employer gave you a gratuity of Rs 12 lakh. You are eligible for a gratuity of Rs 2,59,615 based on the calculation of gratuity in the preceding case. The government has established a maximum tax-free value of Rs 20 lakh. The lowest of the three amounts, Rs 2,59,615 is exempt from taxes. You would be taxed on the remaining Rs 9,40,385 according to your income tax slab. Please take note that the highest tax-exempt gratuity amount you can receive in your lifetime of employment is Rs 20 lakh.

Gratuity Amount Investment Options

A variety of solutions that assist in addressing the financial goals depending on investment horizon and risk appetite must be considered when investing the gratuity amount. Here's a rundown of some of the resources you can consider when it comes to investing the gratuity amount:

• FDs, or fixed deposits: FDs issued by banks or post offices are guaranteed-return investments with minimal risk. They are perfect for people who value safety over greater profits and offer capital preservation.

  
  

• The Public Provident Fund, or PPF, is a tax-efficient long-term investment strategy with a 15-year lock-in period. According to Section 80C of the Income-Tax Act (ITA), 1961, it offers tax benefits and is a well-liked choice for retirement savings.

  
  

• Employee Provident Fund (EPF): People who are anticipating a new position may choose to move their gratuity money to the EPF account. EPF is intended for retirement savings and offers tax advantages in addition to safety.

  
  

• NPS, or the National Pension Scheme: This is a long-term, tax-saving, voluntary retirement savings plan. With this, you can get larger returns by holding a combination of debt and equity securities.

  
  

• Mutual funds for equity: These make stock investments and have the potential to yield larger profits over time. A person can choose from a variety of mutual fund categories based on their investing horizon, risk tolerance, and financial objective.

  
  

• Debt mutual funds: They offer steady returns with less risk compared to equities because they primarily invest in fixed-income instruments like bonds.

  
  

• SGBs, or sovereign gold bonds: These offer tax advantages and give an individual the opportunity to invest in gold in a paperless manner. SGBs have a set interest rate and term.

  
  

• Property: Buying a property directly or indirectly through Real Estate Investment Trusts (REITs) may be a good way to do this.

  
  

• The stock market: Individuals who possess a strong grasp of the stock market and a greater tolerance for risk may consider investing directly in stocks or equity shares.

  
  

• Recurring deposits (RDs) at banks: These provide consistent savings and are best suited for people who anticipate investing a set amount of money each month.

Conclusion

It's crucial to remember that spreading your investments across several asset classes can help you control risk. Additionally, when making investing decisions, consider things like inflation, taxes, and liquidity requirements. Additionally, review and adjust the investment portfolio on a regular basis in response to changing goals and financial conditions.

Frequently Asked Questions

Is gratuity included in Form 16 or CTC?

Gratuities may or may not be shown on Form 16 depending on the employer and are not included in the CTC.

Is there a cap on gratuity payments?

Yes, the highest gratuity is Rs. 20 lakh, irrespective of the number of years worked.

What kind of employees come under the Gratuity Act, 1972?

All workers in India (except from those in government jobs) who work in factories, mines, oilfields, plantations, ports, railroads, and other facilities are covered by the Gratuity Act.

Does gratuity go under CTC?

They do not constitute a part of CTC. It is described as "a present or gift, often given in exchange for services or favours."

I resigned from my job after working for 4.5 years. Would I be eligible to a gratuity?

No, you need to have worked consistently for a minimum of five years in order to qualify for a gratuity. However, it would be paid before five years of service, upon death, or upon disability from an accident or illness.

Will a contract employee be eligible to receive gratuity on completing 5 years in service?

The person is an employee of the corporation if he is listed on its rolls. According to the regulations, he will be given a gratuity. However, the contractor is required to pay the gratuity if he works for a non-company contractor.

Is there an upper limit on the gratuity amount that you will receive?

A company's gratuity cannot exceed Rs 20 lakh, regardless of the number of years of labour.

What is the time that an employer takes to release the gratuity amount?

If an employee is eligible to receive the gratuity, they must apply within 30 days after the date of the payment. Nevertheless, the mere fact that the claimant failed to submit the application within the allotted timeframe does not render the gratuity claim unlawful. The employer has 15 days from the date of application to specify the gratuity amount. After receiving the application, the employer has 30 days to pay the gratuity. If the employer misses this deadline, he will have t pau the gratuity amount along with any simple interest that may have accumulated.

Will I lose the gratuity amount in case my employer goes bankrupt?

The amount of the gratuity would still be due even if your employer filed for bankruptcy. A court ruling is not permitted to suspend the gratuity amount.

What is 15/26 in gratuity calculation?

The following formula is used to determine an employee's gratuity: Gratuity is calculated as follows: Last salary x (15/26) x Years of Service In this instance, 26 represents the anticipated number of working days in a month, and 15 days' wages are used to calculate the gratuity. The basic salary + Dearness Allowance (DA) is multiplied by 26 to determine the daily wage. Half a month's compensation is obtained when the daily wage is doubled by fifteen.

How much gratuity can be availed after five years of service with the same employer?

A person is qualified to earn the gratuity benefit after five years of continuous service with the same company. It is due upon retirement or superannuation, resignation or termination (where the gratuity may be denied if the termination was due to employee misconduct), and death or disability from an accident or illness (in which case the amount of the gratuity will be paid to the nominee or legal heir; five years of continuous service is not applicable in this instance). A maximum gratuity of Rs 20 lakh is specified.

Is it mandatory to serve five years of continuous service to claim gratuity?

Yes, in order to obtain a gratuity, a person must work continuously for five years. However, workers who experience circumstances involving illness, death, or incapacity do not need to work five years in order to collect a gratuity from their employer.

When is an individual paid gratuity?

Gratuities are given to people in the following situations: retirement, voluntary retirement scheme (VRS), layoffs or retrenchments, dismissal or resignation, and death from disease or accident.

Is there any difference in the calculation of gratuity for employees who are not covered under the Gratuity Act?

Your employer may give you a gratuity even if you are not protected by the Gratuity Act. Gratuity is calculated as follows: Average income (basic plus DA) * ½ * Number of years of service.

What is the significance of '15/26' in the gratuity calculation formula?

The figure "15/26" in the method for calculating gratuities means that for every year of service, an employee receives 15 days of pay, which is divided by 26 (the number of working days in a month). The gratuity amount in relation to the employee's monthly income is standardised by this fraction.

What are the tax implications for gratuity received by nominees or legal heirs?

According to Section 10(10) of the Income Tax Act of 1961, nominees and legal heirs are completely exempt from income tax on gratuities received. For the sake of paperwork, the sum must be disclosed. The standard tax regulations for gratuities apply in all other cases, with the exception of gratuities received in connection with the employee's death.

How do gratuity calculators work to estimate gratuity amounts?

Calculators for gratuities make an estimate based on a number of variables, including the employee's years of service, last wage, and any applicable laws or corporate regulations. The calculator helps employees manage their finances after retirement or resignation by using the standard method to generate an estimate based on the data entered by the user.