An All-Inclusive Guide About Gratuity & Gratuity Calculator!

“Nothing is more noble, nothing more venerable, than loyalty.”

~Cicero

Loyalty is indeed a noble virtue. And gratuity is a loyalty benefit that employees are entitled to receive if they complete five years in the same company. Although, the employee can receive gratuity earlier than five years too in situations out of his control like death and disablement due to sickness or accident.

Gratuity payments are regulated by rules laid under the Payment of Gratuity Act 1972.

Let’s learn more about gratuity in India.

What Is Gratuity?

Gratuity is a lump sum monetary benefit that the company makes to its employees once they complete five years in the company. It is a form of gratitude that the company expresses to its employees for staying with them long enough.

The Payment of Gratuity Act 1972 defines all the payment and other rules regarding gratuity.

Also, the maximum limit of gratuity that an employer can give has been capped at ₹20 Lakhs. Also, even if the employee’s gratuity calculates to be, say, ₹5 Lakhs, the employer can give up to ₹20 Lakhs. The extra amount is called ex-gratia.

When Are You Eligible To Receive A Gratuity Payment?

Employees need to fulfil these criteria to receive gratuity:

1. You must be eligible for superannuation.
2. Or when you retire from your service
3. Or when you leave the company after completing five years of service
4. The last situation is the employee’s death or disablement due to sickness or accident. This situation is an exception because you do not need to complete five years in the organization to receive the benefit.

Which Organisations Are Included Under The Gratuity Act?

Now that we know when an employee gets paid its due gratuity, let’s know which organisations are included.

In simple words gratuity act applies to,

1. Every factor, plantation, port, mine, and the railway company.
2. Any shop or establishment with ten or more employees for even a single day in the last 12 months comes under the Act’s purview.

How Do You Calculate Gratuity?

The gratuity payment also differs for both the establishments that need to pay gratuity and those that don’t.

These organisations that do not ‘need’ to pay gratuity can also pay it to show their gratitude to their employees.

#1: Gratuity Calculation For Companies Required To Pay Gratuity

Below is the gratuity formula:

Gratuity = n*b*15 / 26

Where, 

n = number of years spent in the company

b = Last basic salary + Dearness Allowance

For example, Mr Hard working has worked for eight years, and her last payslip was ₹50,000. Then, the gratuity calculation would be like,

Gratuity = 8*50,000*(15/26) = ₹2,30,769.23

#2: Gratuity Calculation For Companies Not Required To Pay Gratuity

The respective gratuity formula is:

Gratuity = n*b*15 / 30

Where n and b are the same as above.

For example, Mr Extraordinary worked for ten years, and her last payslip was ₹50,000. Then, gratuity calculation would be as follows,

Gratuity = 10*50,000*(15/30) = ₹2,50,000

Gratuity Calculation In Case Of Death Of Employee?

Gratuity calculations in case of death are different from the standard process because it allows the employee’s nominee to receive gratuity even if the employee has not served for five years.

Below is the calculation table:

Note: The maximum benefit amount cannot exceed ₹20,00,000.

What Are The Benefits Of Gratuity Calculation?

Gratuity calculation might feel like stress, but the gratuity calculator sorts all this out. And there are many benefits of performing gratuity calculation through a calculator.

1. It lets you know the exact amount you owe without any errors.
2. Once you know the amount, you can plan your investment accordingly
3. You can use the calculator from anywhere- home, office, on the go!
4. It saves a lot of effort on your part!

How Is Tax Calculated On Gratuity?

Gratuity benefit is taxable under the head’ Income from salary’ in most scenarios. The Income Tax Act has different rules for government employees, non-government employees covered under the Act, and non-government employees not covered under the Act.

#1: Government Employees

Every penny received as gratuity is tax-exempt for government employees.

#2: Non-Government Employees Covered Under The Act

The tax-exempt income is the least of the below three:

1. 15/26 * Last month’s salary * no. of years of service
2. ₹20 Lakhs which is the gratuity limit
3. Gratuity Received (Includes ex-gratia)

#3: Non-Government Employees Not Covered Under The Act

The tax-exempt income is the least of the below three:

1. Last month’s half salary * no. of years of service
2. ₹10 Lakhs which is the gratuity limit
3. Gratuity received (Includes ex-gratia)

Let’s take the example of Mr Diligent, who was to receive a gratuity of ₹5 Lakhs. But his grateful employer rewarded him with a gratuity of ₹9 Lakhs.

Since the actual gratuity (5 Lakhs) is less than the gratuity received (9 Lakhs), Mr Diligent will not be paying tax on the initial 5 Lakhs but will pay on the remaining 4 Lakhs.

How To Apply For Gratuity?

Gratuity is usually paid to the employee in cash, cheque, or demand draft, depending on the employer and employee. 

The employee needs to apply for gratuity within 30 days from the date since when it becomes payable.

Once the employee has applied for gratuity, the employer must pay the amount within 30 days of receiving the application.

When The Employer Does Not Needs To Pay Gratuity?

The only reason an employee can be devoid of this benefit is misconduct. Misconduct is not accepted anywhere, and an employee can risk its gratuity due to such behaviour. 

The two situations of misconduct under the law that devoid employees of gratuity are:

1. The employee is fired for disorderly conduct, lawlessness, or any other act of violence.
2. Or, if the employee commits an offence involving moral turpitude during his service tenure, he is also not entitled to the benefit.

How To Invest The Gratuity Amount Received?

Gratuity is received as a lump sum amount. And it makes sense to deposit it in an investment scheme that can take on the inflation rate while keeping your precious amount safe.

Below are a few suggestions that you can consider while making your investment decision.

#1: Senior Citizens Saving Schemes (SCSS)

They are the first option that pops up when thinking of safe retirement investment plans. SCSS is a post office saving scheme and is entirely reliable.

#2: Debt Funds

Debt mutual funds are one of the safest mutual funds. They invest in various securities like corporate bonds, government securities, money market instruments, etc.

#3: Fixed Deposits

Indians have long trusted this investment option for their retirement savings, and it is indeed the safest option available.