Gratuity is a sum of money that an employer pays to an employee in recognition of their service to the company. It is typically provided to employees who have worked with the company for a minimum of five years and is regulated by the Payment of Gratuity Act, 1972.
Eligibility
- Eligibility for superannuation.
- Retirement from service.
- Resignation after continuous employment of five years.
- In the event of the employee’s death, gratuity may be paid to the nominee or to the employee if they become disabled due to illness or accident.
The gratuity amount is calculated based on the employee’s last drawn salary and the duration of their service with the company. The formula for calculating gratuity is:
(15 * last drawn salary * tenure of working) / 26.
A gratuity calculator is a tool that helps estimate the gratuity amount an employee would receive upon leaving the job after completing a continuous five years of service. It requires inputs such as the last drawn salary and the duration of continuous service with the company, including basic salary, dearness allowance, and sales commissions.
The gratuity calculator provides a quick estimate of the gratuity figure, making it a convenient tool for retirement planning or when considering leaving a job. It is user-friendly and can be used multiple times as needed.
Gratuity Calculation – What is the Formula for Calculating the Gratuity?
The amount of gratuity for employees whose employer is covered under the Gratuity Act can be calculated using the formula:
Gratuity = n*b*15 / 26. That is, Gratuity = (Basic Salary * Years of Service * Gratuity Rate) / 26
The formula for calculating gratuity is straightforward: multiply the number of completed years of service by the last drawn basic salary plus dearness allowance, then divide by 26. For instance, if you’ve worked at XYZ company for 15 years with a combined last drawn salary of Rs 30,000, the gratuity would be Rs 2,59,615.
N/B:
- The Gratuity Act mandates a maximum gratuity amount of Rs 20 lakh. Anything beyond this is considered ex-gratia.
- If the tenure in the last year of employment exceeds six months, it’s rounded to the nearest figure. For example, a tenure of 16 years and 7 months warrants gratuity for 17 years.
For employees not covered by the Gratuity Act, gratuity is calculated differently: (15 * Last drawn salary * Tenure) / 30. For instance, with a Rs 30,000 salary over 7 years, the gratuity would be Rs 1,05,000.
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To calculate gratuity using the ClearTax Gratuity Calculator:
- Input your basic salary and dearness allowance
- Enter the number of years you’ve served.
- The calculator instantly provides the gratuity amount, which can be recalculated by adjusting the sliders.
Benefits of using the ClearTax Gratuity Calculator include quick estimates to plan finances efficiently and its accessibility from anywhere.
Regarding taxation, gratuity for government employees is exempt from income tax, while for other eligible private employees, the least of the following is tax-free: Rs 20 lakh, the actual gratuity received, or the eligible gratuity amount. For example, if you received Rs 12 lakh gratuity but were eligible for Rs 2,59,615, only the latter is tax-exempt. Any remaining amount is taxed based on your income slab, with a maximum tax-exempt gratuity of Rs 20 lakh throughout your career.
Conclusion:
Gratuity is a basically as an acknowledgment of an employee’s dedication and service to their employer, regulated by the Payment of Gratuity Act, 1972. Employers and employees alike can utilize tools such as the ClearTax Gratuity Calculator for quick estimations, facilitating effective retirement planning or decision-making regarding employment changes.