Gratuity is a bonus or additional payment, typically given to employees as a reward or recognition for their long-term service and commitment to a company or organization. It is seen in many forms including benefits, monetary rewards, performance bonuses or time-off in lieu of pay. Gratuity is usually awarded to full-time employees after extended years, but part-time and even some temporary employees may also be eligible for some form of gratuity.
Gratuity is often calculated based on a number of variables including the employee’s length of service, job role, or position in the organization, and their salary. It is seen by many as an incentive to stay in the organization or industry and promote a sense of job satisfaction and work loyalty.
Importance of Gratuity?
Gratuity is an important benefit for both employers and employees. For employers, gratuity is a tool to boost employee morale and performance. It
encourages employees to stay with the organization and motivates them to take on extra work or tasks. It is also a way to show appreciation to loyal employees. From the employee’s perspective, gratuity can be a financial cushion to help them have a comfortable standard of living and provide additional security.
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Gratuity calculation seems complex with different salary structures and legal provisions. However, a gratuity calculator makes it easy, error-free, and accessible for both employees and employers.
Benefits of using a Gratuity Calculator:
Easy calculations: This calculator applies the gratuity formula automatically and thus avoids human errors.
Saves Time: Computes gratuity in seconds, with no manual calculations.
Compliant: Follows gratuity act in all respects even as per Payment of gratuity policy in India.
Transparency: This will help staff and employers to know what to expect of the gratuity benefits.
Accurate Results: Gives exact output, so that there is trust in the payout process.
How the Gratuity Calculator Works?
The gratuity calculator calculates the amount based on the status of the employee under the Payment of Gratuity Act, of 1972. The gratuity formula is different for different cover types:
1. For Employees Covered Under the Act:
Gratuity=Last Drawn Salary (Basic + Dearness Allowance)xCompleted Years of Servicex1526Gratuity = Last Drawn Salary (Basic + Dearness Allowance) x Completed Years of Service x 2615
Last Drawn Salary: Will include basic pay and DA.
Completed Years of Service: Total years worked, rounded to the nearest whole number.
15/26: 15 working days of payout of 26 working days during a month.
2. For Employees Not Covered Under the Act:
Gratuity=Last 10 Months’ Average Salary×Completed Years of Service×12Gratuity = Last 10 Months’ Average Salary × Completed Years of Service × 21
Ten Months of Average Salary Salary average (Basic and DA) for the past 10 months.
½: means 15 days of salary for each year of service.
What is the Gratuity Formula?
The formula for gratuity uses the formula to determine the amount of gratuity that an employee is entitled to by the salary they last received as well as years of service as well as whether or not the company is protected by the Pay of Gratuity Act 1972.
The formula varies based on the type of cover.
For employees who work for employers that are covered under the Payment of Gratuity Act, of 1972, the formula to calculate gratuity is:
Gratuity=Last Drawn Salary (Basic + Dearness Allowance)completed Years of Servicex1526Gratuity = Last Drawn Salary (Basic + Dearness Allowance) x Completed Years of Service x 2615
Where:
Last Drawn Salary: Includes Basic Pay and Dearness Allowance (DA).
Completed Years of Service: Total years worked, rounded to the nearest whole number.
15/26: This is the equivalent of 15 days’ pay in a calendar year (assumption of 15 consecutive days out of the 26 working days per month).
Gratuity Formula for Employees Not Covered Under the Act
In case of employees not covered under the Act the computation would be:
Gratuity=Last 10 Months’ Average Salary (Basic + DA)x Completed Years of Servicex12Gratuity = Last 10 Months’ Average Salary (Basic + DA) x Completed Years of Service x 21
Where:
Last 10 Months Average Salary: Average Basic Pay and Dearness Allowance over the last 10 months.
½: Means half a month’s salary for every year of service.
Example Calculations
Case 1: Covered Under the Payment of Gratuity Act
Raj has been with an employer who is covered under the Payment of Gratuity Law Act since he joined 20 years back. His last drawn salary is Basic + DA ₹50,000.
Gratuity=₹50,000×1526Gratuity = ₹50,000 × 2615
Where:
Last Drawn Salary: ₹50,000 (Basic + DA)
Completed Years of Service: 20
Case 2: Not Covered Under the Payment of Gratuity Act
Priya is working in a private firm not covered under the Act and has completed 15 years of service and her average salary for the last 10 months is ₹ 40,000.
Gratuity = ₹40,000×12Gratuity = ₹40,000 × 21
Case 1: Not Covered Under the Act
Priya is an employee of a private company not governed by the Act. She has 20 years of service. Her last 10 months average salary (Basic + DA) is ₹50,000.
Raj is an employee who served 25 years in any organization where gratuity is applicable in India. His last drawn salary including (Basic + DA) is ₹60,000.
Gratuity=Average Salary×12Gratuity = Average Salary × 21
Tax-Exempt Amount: The lesser of the following amounts is free of tax
Actual gratuity received: ₹8,65,385
15 days’ salary per completed year: ₹8,65,385
₹20,00,000
Exemption: ₹8,65,385 is fully exempt.
Case 2: Not Covered Under the Payment of Gratuity Act
Priya has completed 20 years of service in a private firm not covered under the Act. Her average salary (Basic + DA) for the last 10 months is ₹50,000.
Gratuity=Average Salary×12Gratuity = Average Salary × 21
Average Salary: ₹50,000
Completed Years of Service: 20
Tax-Exempt Amount: The lower of the following is exempt from tax:
Actual gratuity received: ₹5,00,000
15 days’ salary per completed year: ₹5,00,000
₹20,00,000
Exemption: ₹5,00,000 is fully exempt.
Gratuity Tax Rules
Gratuity is taxable under Section 10(10) of the Income Tax Act, 1961 for the following types of employees:
1. Government Employees
Gratuity is fully tax-exempt.
2. Non-Government Employees Covered Under the Payment of Gratuity Act
The exemption is the following:
Actual gratuity.
15 days’ salary per completed year.
₹20,00,000 (max).
3. For Non-Government Employees Not Covered Under the Act
The exemption is the lower of the following:
Actual gratuity.
Half a month’s salary per completed year.
₹20,00,000 (max).
Gratuity Tax Exemptions
The gratuity tax exemption limit is ₹20,00,000. This is a lifetime aggregate limit, no matter how many employers you have had, this amount remains the same. Any gratuity amount above this will attract the applicable income tax slab.
Gratuity Calculator Features
User Interface: Simple and easy to use.
Customizable Inputs: Enter the exact gratuity in salary and service years.
Instant Results: Calculates gratuity in seconds.
Legal Compliance: As per gratuity rules in India.
Benefits of Using a Gratuity Calculator
Accurate: No human error in complex calculations.
Time-Saving: Calculate gratuity for multiple employees in seconds.
Fair: Consistent payouts for all employees.
Trust: Builds confidence in the organization’s gratuity benefits employee.
FAQs
Can part-time employees receive gratuity?
Yes, part-time employees may be eligible for gratuity as long as they meet the eligibility criteria outlined by the organization or their contract. However, the terms and conditions may differ from that of full-time employees.
How is gratuity different from a provident fund?
A gratuity is an additional amount of money given to employees for their continued service to an organization. A provident fund is a pension fund established by an employer or organization to provide additional savings and retirement benefits to its employees.
What happens if an employer doesn’t pay gratuity?
If an employer fails to pay gratuity, the organization is liable for the payment under the Payment of Gratuity Act 1972. An employee may file a complaint with labor commissions or tribunals for payment of gratuity, interest, and compensation.
Who is exempt from Gratuity in India?
Certain establishments and employees are exempt from the Payment of Gratuity Act, of 1972. These exemptions prevent redundancy where gratuity or pension is already provided.
What is Gratuity Nomination?
Under Section 6 of the Payment of Gratuity Act, 1972, the gratuity entitlement can be nominated by the employee as payable to the nominated nominee in case of death. Otherwise, it will cause delays and disputes in gratuity payments.
What is Mandatory Insurance for Gratuity?
All private employers covered under the Payment of Gratuity Act, 1972 have to take insurance for gratuity from approved insurers like LIC or other approved entities so that gratuity is not left unpaid in case the employer does not pay it.
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