How to Calculate Gratuity?

Gratuity is a sum amount that an employer gives to an employee under the Payment of Gratuity Act 1972. It is a benefit that every employee who is covered under the Gratuity Act 1972.

This is also treated as a gift hence, some tax benefit is also provided under this Therefore, you can get a greater sum of benefit due to this.

If you are an employee and want to know how much money you’ll get then here in this article, we will discuss how to calculate the gratuity, eligibility, taxation, etc.

Eligibility Criteria

The following are the eligibility criteria for gratuity:

• An employee should be eligible for superannuation, which  is a retirement benefit offered to the employee by the employer
• An employee resigns after working for 5 years with a single employer
• An employee passes away or suffers disability due to illness or accident

How to Calculate Gratuity?

You can calculate the gratuity based on whether you are covered under gratuity or not, which is as follows:

Calculate of Gratuity

Calculating gratuity is important to find whether you are compensated promised gratuity or not. The gratuity act formulates the calculation of gratuity which is as follows:

Gratuity Amount = 15 * (Your last drawn salary * the working tenure) / 30

The working tenure here can be calculated as the number of years in the company. For example- an individual with a salary of Rs.50,000 per month for 26 years can get a gratuity of 15*(50,000*26)/30= Rs.6,50,000/-.

If an employer wants he/she can pay more gratuity than the said amount and the amount presented is only a minimum cap which will be used for calculation of the gratuity.

Calculation of Gratuity for the Employees Who Are Not Covered under the Gratuity Act

The employees who are not covered under gratuity can still be eligible for gratuity and the calculation will be the individual’s half month’s salary for every year that has been completed.

Gratuity Amount = (15 * Last drawn salary amount * period of service) / 30

For example, if you have been at a company for 15 years and 8 months and your salary is Rs.50,000, the calculation of the gratuity amount is (15 * 50,000 * 16) / 30 = 4,00,000/-.

Here for calculation round-off is made i.e. anything less than 6 months is considered a lower whole number and anything above 6 months will be considered a higher whole number.

Calculation of Gratuity in Case of Death of an Employee

The calculation of the gratuity in case of the death of an employee will be based on the tenure of the employee. The following are the Calculation of Gratuity in the Case of Death of an Employee:

Tenure of service	The amount payable towards gratuity
Less than a year	2 * basis salary
1 year or more but less than 5 years	6 * basic salary
5 years or more but less than 11 years	12 * basic salary
11 years or more but less than 20 years	20 * basic salary
20 years or more	Half of the basic salary for each completed six-monthly period. However, it is subject to a maximum of 33 times the basic salary.

Taxation of Gratuity

The taxation of the gratuity will depend on the type of organization you are working in, The following are the bifurcation for the Taxation of Gratuity:

• Government Employee- Tax exemption on Gratuity
• Private Employee- 15 days salary exempted from taxation
• Other private employee not covered under the gratuity act- Rs.20 lakh or Gratuity received by the employee or The gratuity amount eligible to be received the least of these

Rules of Gratuity

The following are the rules of Gratuity:

Forfeiture of Gratuity

As per the Payment of Gratuity Act of 1972, the employer has a right to withhold part of or the full amount of the employee’s gratuity in case the employee has been fired due to disorderly behavior. This can be done even if you have completed 5 years of minimum cap.

Timeline for Gratuity payment

The time taken by the employer to release the gratuity amount is 30 days and will go through various stages, which are as follows:

• Initiation- Here in this step, you’ll have to initiate your gratuity application regarding the gratuity to the employer
• Acknowledgment and Calculation- The employer will acknowledge the application calculate the Gratuity amount and send you the notice with these details which you’ll have to confirm
• Disbursal- The employer will then release the Gratuity amount within 30 days of the application

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