Gratuity Calculation: Gratuity is the most important benefit for employed people, which is given by the company for working for a long time. It is the amount received on retirement or leaving the job, which gives financial security and is regulated under the ‘Gratuity Act 1972’.
Gratuity is one of the most important financial benefits for employed people. Gratuity is given by the company to the employee who works continuously for many years. Let us tell you that when an employee retires, leaves the job or resigns, then he gets a lump sum amount as gratuity. This amount is given under the rules of ‘Payment of Gratuity Act, 1972’. So if you have worked continuously for 10 years in a company and your last salary is around ₹ 55,000, then let us know how much gratuity is and other important things related to it.
What is gratuity and its eligibility?
Gratuity is a financial benefit that the company gives to an employee in return for his long service. It is a kind of “thank you” from the company. * Retires.
When is gratuity received?
Gratuity is given when the employee:
Retires, resigns, works for a company continuously for 5 years (if the employee dies or becomes disabled, the 5-year condition is not necessary), or the company closes down or is bought by another company.
Formula for calculating gratuity
Let us tell you that there is a fixed formula to understand gratuity which applies to employees covered under the ‘Payment of Gratuity Act, 1972’:
Gratuity = (Last drawn salary) x (15 / 26) x (number of completed years of service)
Last drawn salary:
It is the salary that the employee receives for the last time. It includes basic salary and dearness allowance (DA). However, in some cases, if the employee gets commission on sales, it can also be added to it.
15/26:
This is a part of the formula used in the calculation of gratuity. It means that the employee is given 15 days’ salary for every year of service. Here 26 working days are considered in a month, because 4 Sundays or holidays are kept aside.
Number of completed years of service:
If an employee has worked for 5 years 6 months or more, then it is considered as the next full year i.e. 6 years, but if he has worked for 5 years and 5 months, then only 5 years will be counted, the same rule applies in the calculation of gratuity.
Calculating Gratuity in your example:
- As per the given information:
- Duration of working in the company: 10 years
- Last Salary (assuming Basic + DA): ₹55,000 per month
Now let’s use the formula:
- Gratuity = ₹55,000 x (15 / 26) x 10
- Gratuity = ₹55,000 x 0.57692307 x 10
- Gratuity = ₹31,730.769 x 10
- I.e.: ₹55,000 × (15/26) × 10 = ₹3,17,307.69
I.e. As per this calculation, if your company is covered under the ‘Payment of Gratuity Act, 1972’, you will get approximately ₹31,730.769 after 10 years Gratuity amount of ₹3,17,308 will be received.
Maximum limit of gratuity
Currently, the maximum limit of gratuity payment under the ‘Payment of Gratuity Act, 1972’ is fixed at ₹20 lakh. This means that if according to the calculation your gratuity amount comes out to be more than ₹20 lakh, then also you will get a maximum of ₹20 lakh. However, many companies may choose to give gratuity to their employees above this limit, but it is not legally mandatory. (Note- The news is based on general information, consult an expert for more information about gratuity)
FAQ
Q1. What is gratuity and who gets it?
A1. Gratuity is a retirement benefit, which the company gives to employees who have served for 5 years or more.
Q2. How is gratuity calculated?
A2. Gratuity = Last salary × (15/26) × total service years; where last salary includes basic + DA.
Q3. Is gratuity tax free?
A3. For government employees, the entire gratuity is tax free, while in the private sector, tax exemption of up to ₹20 lakh is available on certain conditions.
Q4. How much gratuity can an employee get if he serves for 10 years?
A4. If the last salary is ₹55,000, then 10 years of service can fetch a gratuity of around ₹3.17 lakh.
Q5. What is the minimum service period for gratuity?
A5. Usually at least 5 years of continuous service is required, but this condition is not applicable in case of death or permanent disability.
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