After 5 years of service, each private firm employee getting EPF (Employee Provident Fund) perks is entitled to a gratuity. You may be entitled to a gratuity amount before five years if you are wounded and handicapped in an accident or due to an illness. Many websites provide a gratuity calculator for free, which you can use to figure out how much your company owes you. The Payment of Gratuity Act of 1972 governs the gratuity payment regulations. The sum is determined by the last wage received and the number of years of employment with the organisation.
If you are entitled to gratuity, you must determine how much you are entitled to. Continue reading if you want to learn more.
What is Gratuity in India?
Gratuity is a monetary reward given to a worker in one lump sum by the employer. The firm pays it as a token of appreciation for their contribution to the firm. The purpose of gratuity payment is to provide workers with retirement benefits. The Gratuity Payment Act of 1972 oversees gratuity and its payment criteria. An employee must meet certain conditions to qualify for gratuity payments under this Act.
The employee must have been with the firm for at least five years. The employee cannot have another full-time job. In the event of the employee’s death or incapacity before the completion of five years, the employee has a right to a gratuity. The gratuity cannot be more than INR 10 lakhs. If there is an excess, it is considered ex-gratia. Ex-gratia is a voluntary payment that is not required by law.
The number of months worked is important in calculating gratuity. If an employee works for more than six months in the final year of employment, it is rounded up to the next number. For instance, if a person works for 15 years and seven months, the total number of years of service is 16. Yet, if the employee only works for 15 years and 5 months, the number of years of service is 15.
The Payment of Gratuity Act of 1972 sets rules for calculating gratuity. There are two types of workers under these rules. The Act also specifies the groups subject to the Act’s provisions.
What is a Gratuity Calculator?
The gratuity calculator will calculate the gratuity amount using the gratuity calculation formula.
Formula for Gratuity:
(15 your last drawn salary tenure of working) / 26.
- A tool that assesses how much you may be paid in gratuities after five years of steady service is called a gratuity calculator. It is a helpful tool for figuring out the gratuity on retirement.
- The most recently drawn salary and the duration of constant employment with the firm must be given. Your current salary includes your dearness allowance, basic pay, and sales commission.
- The gratuity calculator will calculate your gratuity in seconds. It is easy to use and may be used several times.
What is the Gratuity Amount Calculation Formula?
- The Gratuity Act says that the following formula can be used to figure out how much a worker’s gratuity amount will be:
Gratuity = nb15 / 26
- Where n is the number of years of service performed at the firm.
- b = Most recently received basic income + dearness allowance
For example, suppose you’ve been with ABC Corporation for 15 years. Your previous basic pay plus dearness allowance was Rs 30,000. Therefore the gratuity amount is assessed as 15 30,000 15 / 26 = Rs 2,59,615.
Two points should be made here:
- According to the Gratuity Act, the gratuity amount cannot exceed Rs 20 lakh. Any excess would be considered ex-gratia.
- If the amount of time you worked in the previous year of employment exceeded six months, it will be reduced to the next whole number. If your service duration is 16 years and 7 months, you will earn a gratuity for 17 years. Otherwise, if it is for 16 years and 4 months, the gratuity is for 16 years.
- For workers whose company is not covered by the Gratuity Act, the gratuity amount would be equal to a half-month’s pay for each year of service.
The calculation is (15 your latest drawn wage for the period of your work) / 30.
Suppose you earn Rs 30,000 per month. You have worked for the company for seven years, and the Gratuity Act does not cover the firm.
Amount of Gratuity = (15 30,000 7) / 30 = Rs 1,05,000.
Eligibility rules for receiving a gratuity
You are eligible for the gratuity if you meet the following criteria:
- The person must be eligible for a pension.
- The employee must have quit his or her work after five years of ongoing work with the same firm.
- The person must have left their work.
- If the person dies or becomes disabled due to an accident or illness.
Gratuity Taxation Rules
The taxes that apply to the gratuity amount vary based on the kind of worker:
Any sum received as a gratuity by a government employee is tax-free. If the firm is covered under the Payment of Gratuity Act, the least of the following three sums will be exempt from income tax for private-sector workers.
- INR 20 lakh
- The actual gratuity amount
- Eligible amount
The highest tax-free gratuity amount an employee may claim during his or her whole work career is Rs 20 lakh.
Using a gratuity calculator, you may determine how much you are entitled to. A person’s compensation includes a gratuity. It is one factor contributing to an individual’s gross compensation. In other terms, a gratuity amount is a monetary payment made to an employee after his or her job term. It is a sort of reward given to an employee for services rendered.
Although it is due upon retirement, it might be given to the employee in advance based on the terms. The worker must have worked for a company for at least five years. It may be paid well before the five-year mark if the person dies, becomes disabled, or becomes sick.
Visit Piramal Finance to read related blogs and learn more about their products and services, as well as to find out more about gratuity amounts.