Gratuity is a form of monetary benefit provided by an employer to an employee in recognition of the employee’s long and meritorious service. It is governed by the Payment of Gratuity Act, 1972 in India.
In India, gratuity is a statutory benefit provided to employees by their employers as recognition for their long and meritorious service. The Payment of Gratuity Act, 1972 governs the payment of gratuity to employees in establishments employing 10 or more persons.
Gratuity Calculation: If you have also worked continuously in a company for 5, 7, or 10 years, then how much gratuity are you entitled to? Here, learn the formula through which you can easily calculate this.
Gratuity Calculation Formula
According to the rules of the Gratuity Payment Act 1972, if you have completed continuous service of 5 years in any company, you become entitled to receive the gratuity amount from that company. However, within the ambit of this act, only those companies come under its purview where employees work for 10 or more years.
Gratuity is the amount rewarded by a company to an employee as a token of appreciation for their long-term excellent service. Typically, this amount is given upon leaving the job or at the time of retirement. If you have also worked continuously in a company for 5, 7, or 10 years, then how much gratuity are you entitled to? Learn the Gratuity Calculation Formula here.
This formula calculates gratuity:
Gratuity = (Last Salary) x (Number of Years Worked in the Company) x (15/26). Here, Last Salary refers to the average of your salary for the last 10 months. This salary includes the basic salary, dearness allowance, and commission. Since there are 4 weekly offs in a month, 26 days are considered in a month, and gratuity is calculated based on 15 days.
Understand the calculation process.
Let’s understand the calculations:
- If you worked for 5 years with a last salary of Rs. 35,000, according to the formula, (35,000) x (5) x (15/26) = Rs. 1,00,961 will be your gratuity amount.
- Similarly, if you worked for 7 years with a last salary of Rs. 50,000, the calculation would be (50,000) x (7) x (15/26) = Rs. 2,01,923 gratuity.
- And if you worked continuously for 10 years with a last salary of Rs. 75,000, the calculation would be (75,000) x (10) x (15/26) = Rs. 4,32,692 gratuity.
In this situation, the calculation varies:
When the company or institution is not registered under the Gratuity Act, employees do not come under the Gratuity Act. However, if the company wishes, it can provide gratuity to employees, but in this case, the formula for calculating gratuity changes. In such cases, the gratuity amount will be equivalent to half-month’s salary for each year. However, the number of days worked in a month will be considered as 30 days, not 26.
Here are some key points about gratuity:
- Eligibility: Employees who have completed a minimum of 5 years of continuous service with an employer are eligible to receive gratuity. However, there are certain exceptions and conditions as per the Gratuity Act.
- Calculation: Gratuity is calculated based on the employee’s last drawn salary and the number of years of completed service. The formula for calculating gratuity is typically (Last drawn salary) x (Number of completed years of service) x (15/26).
- Payment: Gratuity is usually paid by the employer to the employee upon retirement, resignation, or termination of employment. It is considered a part of the employee’s retirement benefits.
- Taxation: Gratuity received by an employee is exempt from income tax up to a certain limit, as specified by the Income Tax Act, 1961. The exemption limit is determined based on the employee’s tenure of service and salary.
The Modi government has taken a significant decision in the cabinet meeting. The tax-free gratuity limit has been increased to 25 lakh rupees. Previously, this limit was 20 lakh rupees.
In the Cabinet meeting, a significant decision regarding gratuity has been made. The Modi government has increased the tax-free limit for gratuity to 25 lakh rupees. Now, no tax will be levied on gratuity up to this amount. Previously, the limit was 20 lakh rupees. The CBDT had increased the tax-free gratuity limit from 10 lakh to 20 lakh rupees in a notification dated March 8, 2019.
Overall, gratuity serves as a financial reward and acknowledgment of an employee’s dedication and loyalty to their employer over a significant period of time.