Gratuity is a cash benefit paid by an organisation to an employee against the service provided by the individual. It is usually paid when employees retire or leave an organisation provided that they have at least completed 5 years of service. However, in cases of death and disablement, the rule is relaxed.
Individuals can use the gratuity calculation formula to determine an amount they are entitled to avail, or they can use an online gratuity calculator.
Calculation of gratuity is done by two methods according to the Payment of Gratuity Act, 1972. The two categories cover both the government and private sector employees. Individuals should calculate their gratuity funds as it can help to increase their retirement savings.
Gratuity Calculation Formula
Employees covered under the act
Individuals can calculate the amount of gratuity they are liable to earn by considering two important factors- numbers of years of service and last salary drawn.
They can calculate their gratuity with the formulae-
Amount of gratuity = Last drawn salary x (15/26) x Years of service rendered.
Where the number of working days per month is taken as 26 and the gratuity calculation is done at the rate of wages for 15 days.
Last drawn salary can be calculated carefully by considering the following components-
- Basic salary.
- Dearness allowance in case of Government employees.
- Commission they receive on sales.
The amount paid as Gratuity cannot exceed Rs. 10 Lakh according to the Gratuity Act. The total amount received as gratuity will be exempted from income tax in case of government employees.
Rules of gratuity
The regulations for gratuity are mentioned below-
- Organisations with at least 10 employees working on a single day for the previous 12 months are liable to pay gratuity.
- Gratuity limit for an individual is Rs. 20 Lakh. Individuals are liable to pay tax for gratuity above that limit.
- Employers can give an excess gratuity to any employee.
- Organisations can forfeit gratuity if an employee makes a loss to the company.
Employers are liable to provide a gratuity to its employees if the following eligibility criteria are met.
- Employees have to render services of at least 5 years to the organisation.
- Temporary staff, contract workers, etc. are eligible for gratuity.
- Employees transferred overseas for an assignment are eligible to avail gratuity provided that they are on the company payroll.
- Probation period of an employee is considered while determining the years of service.
- Gratuity will be paid to an employee only at the time of –
- Death or disablement due to accident or disease.
- Resignation or termination.
- In the case of lay-off.
- Voluntary retirement.
How to use gratuity funds to increase savings
Gratuity funds can significantly increase the savings of an individual if invested wisely. They can invest the amount in a fixed deposit scheme to make the most out of it.
The current interest rates in case of a fixed deposit are significantly higher compared to other risk-free investment schemes available in the market.
Bajaj Finance Fixed Deposit is one such scheme that offers lucrative benefits like-
- Flexible tenor.
- High interest rate.
- Flexible interest pay-out options.
Individuals can use an online fixed deposit calculator to determine the interest they will earn by investing the funds received as gratuity in a fixed deposit scheme. Compare the returns with other schemes and decide as per your convenience.
Employees must be aware of the gratuity amount they are entitled to avail. They should know to calculate the amount using the gratuity calculation formula mentioned above and plan their future investments wisely.