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Gratuity Calculator

Gratuity is a lump sum amount that an organization pays to its employee when he or she leaves an organization. This is one of the many retirement benefits offered by an organization to its employees provided if an employee completes working continuously for five years in that organization. The Payment of Gratuity Act of 1972 sets out a list of rules and requirements associated with gratuity in India. 

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  • Number of years / months in service
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    How many years and months have you worked in your current job ?
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Total gratuity Payable to you is

What is Gratuity Calculator?

A Gratuity Calculator is a tool which helps an individual to estimate how much of gratuity they will earn once they retire.An individual will become eligible to earn gratuity only if he/she has worked in a company for more than five continuous years.

What is Gratuity?

The term gratuity refers to a sum of amount which an employer pays to his employee for the services rendered by him/her during the period of employment.

The gratuity amount is usually paid to an employee either at the time of retirement or at the time of leaving the job provided fulfillment of certain conditions.

An individual has to render services in an organization for a minimum period of five years of services in order to be eligible to receive gratuity. In case of the death of an employee or disablement of an employee due to an accident or a disease, the gratuity money will be paid before the completion of five years tenure.

Eligibility Criteria for an individual to receive Gratuity

One should fulfill the following criteria to secure the gratuity amount

1. An employee should have rendered his/her services in an organization continuously for a period of 5 years with a single employer
2. An employee should be eligible for superannuation
3. An employee retires from his/her services
4. Death of the employee or an employee suffers disability due to accident or ill-health.

Payment of Gratuity

The payment of gratuity mainly depends on two factors

• Last drawn salary
• Total number of years of services

There is no set percentage which is stipulated by the law for the exact amount of gratuity an employee is supposed to receive at the time of retirement or at the time of leaving an organization. An employer can use a formula based approach to arrive at the end result or can even pay higher than that.

Categorization of Employees as per Payment of Gratuity Act of 1972

To calculate the gratuity amount payable to an employee, the Payment of Gratuity Act of 1972 has categorized employees into two categories namely -

• Employees who are covered under the Gratuity Act
• Employees who are not covered under the Gratuity Act

If an organization employs a minimum of 10 persons on a single day for the last 12 months, then all the employees who work in that organization are covered under the Payment of Gratuity Act of 1972. Once the organization comes under the purview of the act, it will always remain covered despite if the total number of employees employed in the organization fall below 10.

The Payment of Gratuity Act of 1972 covers to all those employees who are working in factories, mines, companies, ports, plantations, mines and all those firms which have more than 10 employees in it. The gratuity amount, unlike the provident fund, is paid completely by the employer and employee will not be contributing anything towards the fund.

The employer can either offer gratuity to his/her employee either from their own pocket or they may opt for a group gratuity plan with a suitable insurance provider. Annual contributions will be made by the employer toward the plan to the insurance provider. The gratuity paid by the insurance company is based on the clauses in the group insurance scheme.

How to calculate Gratuity Online?

For calculating the gratuity amount payable, an employee has to be classified into those who are covered under the Payment of Gratuity Act of 1972 and those who are not.

For employees who are covered under the Payment of Gratuity Act of 1972

One has to apply the formula for calculating the gratuity payable to employees who are covered under the Gratuity Act.

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 in excess of 6 months. The last drawn salary in this context includes basic salary, dearness allowance and commission on sales.

Here 15/26 will represent the 15 days out of 26 working days in a month.

Example

Mr Skanda’s last drawn basic pay is Rs 45000 per month and he was an employee with XYZ Ltd for 24 years and 10 months.

In the above-mentioned case, the gratuity will be calculated using the formula

Gratuity Amount = (15 X last drawn salary X period of employment)/ 26

Gratuity amount of Mr Skanda = (15 X 45000 X 25)/26 = 6,49,038.

In this case, the total tenure of service of 24 years and 10 months of Mr Skanda has been rounded off to 25 years.

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

Formula to arrive at the 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

Here, the gratuity amount is paid based on the half month’s salary for every completed year of service. The last drawn salary includes basic salary, dearness allowance and commission on sales. 

Here 15/30 will represent the 15 days out of 30 working days in a month.

The total number of years of service will be rounded down to the nearest full year.

For Example: If the employee has a total service of 10 years, 6 months and 20 days, in this case period of employment will be factored to 11 years.

Example

Mr Krishna is working in a firm that is not covered under the Payment of Gratuity Act of 1972. His last drawn salary i.e. basic pay is Rs 30,000 per month and he has worked with the organization for 23 years and 5 months.

In the above case, one has to use the below-mentioned formula to arrive at the gratuity amount.

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

Gratuity amount earned by Mr Krishna is (15 X 30,000 X 24)/30 = 3,45,000

Here, the tenure of service is rounded off to next number and as Mr Krishna has worked in the firm for 23 years and 5 months, the years of service is taken as 24.

Taxation Rules for Gratuity

The taxation rules for gratuity mainly depends on the nature of the employee who is receiving the gratuity amount. They are classified into three categories namely

Government Employee: A government employee is eligible for tax-free gratuity. The total amount received by a government employee be it a state government or central government or local authority as gratuity will be exempt completely from income tax.

Employers who are covered under Payment of Gratuity Act: In this case, those employees whose employer is covered under the payment of gratuity act, only the last drawn salary of fifteen days will be exempt from income tax.

Employees whose employer is not covered under the Payment of Gratuity Act of 1972: In this case, the least of the following amounts will be exempt from income tax

a) The actual amount of gratuity received
            or
b) Rs 10 lakhs
            or
c) Half month’s salary for every year of employment that the employee has completed with the employer.

Note: In the recently announced interim budget of 2019, the government of India has raised the bar for gratuity amount ceiling to Rs 20 lakhs from the existing limit of Rs 10 lakhs with effect from March 29, 2018. The move will help those employees who are working in PSUs and for those who are not covered under the Payment of Gratuity Act 1972.

Forfeiture of gratuity

In some cases, the payment of gratuity to an employee stands wholly forfeited if

  • The service of such an employee is terminated for any act which constitutes an offence and involves moral turpitude if such an offence is committed during the course of employment.
  • The service of such an employee has been terminated due to disorderly conduct or any other act of violence.

For forfeiture of an employee, one should have received termination orders which contains charges as established to the effect that the employee was found guilty of the aforesaid misconduct.

In one of the cases, it has been held that in the absence of termination order containing any of the above allegations, the gratuity of an employee cannot be forfeited.

FAQs on Gratuity

1. Who is eligible for Gratuity?

All those employees who have completed five years of continuous service in the same organization are eligible for gratuity. The employee will be eligible to receive gratuity amount on the termination of the employment after serving an organization continuously for five years or more.

2. When does an individual get the gratuity amount?

The gratuity amount is payable on

  • Termination or resignation
  • Retirement
  • Death or disablement due to disease or accident
  • Voluntary Retirement Scheme (VRS)
  • Retrenchment or layoff

Please Note: The five years of continuous service in the same organization is not required in case of death or disablement of an employee. In such cases, the nominee or heir of the employee will be entitled to receive the gratuity amount.

3. What is the formula to calculate the gratuity amount?

There are two different formulas to calculate the gratuity amount:

Employees who are covered under the Gratuity Act

Gratuity = Last drawn salary*15/26*Number of completed years of service

Please note: Last drawn salary is the addition of both Basic Salary + Dearness Allowance (DA)

Employees who are not covered under the Gratuity Act

Gratuity = Average Salary * ½ * Number of years of service

Note: Average Salary = Basic Salary + Dearness Allowance + Commission (as a percentage of turnover achieved by the employee, if any)

4. Is five years of continuous service rule a must get gratuity amount?
The condition of five years of continuous service is usually applicable but the same is exempted in case of death or disablement of an employee during the tenure of his/her employment in an organization. In such cases, the individual's nominee or legal heir will be eligible to get the gratuity amount (applicable only in case of death of the employee).

5. Are the temporary or contractual employees eligible to receive gratuity?

Yes, the temporary or contractual employees are eligible to receive gratuity amount if they are considered as employees of the organization.

Note: Those who are in apprenticeship are not eligible for gratuity.

6. What is the income tax limitations for gratuity amount?

As per the recent notification from the Government of India, the income tax relations for gratuity payment limit has been increased to Rs 20 lakh from the previous limit of Rs 10 lakh. 

7. Is nomination facility available for gratuity?

Yes, nomination facility is available for gratuity and one has to fill in Form ‘F’ a the time of joining the company to nominate the beneficiary.

8. Gratuity amount received by an employee is taxable under which head under Income Tax Act?

The gratuity amount received by the employee on retirement or during the service period is taxable under the head Income from Salary. The amount of gratuity received should be shown under the head salaries while computing income tax returns. The same rule is applicable to all the government and private employees. 

9. If an organization is not financially stable can it refuse to pay gratuity amount to its employees?

Irrespective of the financial stability of an organization, they are bound to pay the gratuity amount to its employees. They cannot cite the financial loss as a reason for refusal of payment of gratuity.

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