Gratuity

Gratuity is a financial component offered by an employer to an employee in recognition of his/her service rendered to an organisation. But the gratuity is paid only to employees who have completed five or more years with the company.

What is gratuity?

A gratuity is a form of monetary benefit provided by an employer to an employee as a token of appreciation for the services rendered by the employee after completing five years. However, these five years must be continuous, and there should not be any gap in the services of the employee with that organization. This is governed by the Payment of Gratuity Act, 1972. In this way, gratuity works as a retirement benefit that an employee receives after working for at least five years in a row with a company.

Additionally, in certain situations, such as if an employee becomes disabled due to an accident or a disease, they can receive gratuity even before completing five years of service. This exception is made to support employees who face unexpected challenges that prevent them from continuing their work.

What is a gratuity calculator?

A gratuity calculator is a tool to estimate the amount of gratuity that one will earn once he/she leaves a job after completing at least five years in the service of a company. There are many online gratuity calculators available that estimate the amount of gratuity a person will get. The gratuity calculators work on the gratuity formula that calculates the gratuity amount concerning the input values such as last drawn monthly income, years (including the months) in service with the company, dearness allowance, etc.

What is the eligibility criteria to receive gratuity?

The individual must be eligible for superannuation.
The individual must have resigned from his/her job after continuous employment with the same organization for five years.
The individual must be retired from their job.
In case of the death of that person, or if they become disabled due to accident or sickness.

How to calculate gratuity?

For gratuity calculation online, one has to apply the gratuity formula. However, to use this formula, an employee has to fall into any of the below categories:

Those who are covered under the Payment of Gratuity Act, 1972.
Those who are not covered under the Payment of Gratuity Act, 1972.

For Employees Who Are Covered Under the Payment of Gratuity Act, 1972:
Gratuity Formula: The formula to calculate gratuity is as follows:
Gratuity Amount = (15 * Salary Last Drawn * Employment Period) / 26
Here, “Salary Last Drawn” includes the basic salary, commission on sales, and dearness allowance.
Let’s take an example to illustrate this formula:
Mr. X’s last drawn basic salary is Rs. 40,000 per month, and he worked with ABC Company for 25 years and 10 months.
Applying the formula:
Gratuity Amount of Mr. X = (15 * 40000 * 26) / 26 = Rs. 6,00,000
In this case, since the total tenure of service is 25 years and 10 months (which is rounded off to 26 years), Mr. X’s gratuity is Rs. 6,00,000.
For Employees Who Are Not Covered under the Payment of Gratuity 1972, Act:
Gratuity Amount = (15 * Last Drawn Salary * Years of Service) / 30
This calculation considers half a month’s salary for each year of service. “Last Drawn Salary” includes basic pay, commission, and dearness allowance. The 15/30 represents half of a month’s working days. Years of service are rounded down to the nearest full year.
Let’s take an example to illustrate this formula
If Mr. X worked for 24 years and 5 months with a last drawn salary of Rs. 30,000:
Gratuity Amount = (15 * 30,000 * 25) / 30 = Rs. 3,75,000.
This is how you can calculate gratuity using the formula.

What are the taxation rules for gratuity payment?

For government employees, be they at the central, state, or local level, the gratuity amount is entirely tax-exempt.

For eligible private employees under an employer covered by the Gratuity Act, the lowest of the following three will be tax-exempt:

Rs 20 lakh.
The actual received gratuity amount.
The eligible gratuity.

FAQs

Can an employer refuse to pay gratuity?

An employer can refuse to pay gratuity if the employee’s termination is due to unethical behavior, wilful misconduct, or if the employee has not completed the minimum tenure of five years.

Can an employee receive a gratuity before completing five years of service?

In certain cases, like death or incapacitation due to an accident or illness, an employee or their legal heirs may be eligible for gratuity before completing five years of service.

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