Gratuity is an employment benefit provided by companies and the government under the Payment of Gratuity Act, 1972 to employees after completion of five years of service. It is a contribution to the superannuation fund calculated on the basis of service rendered by the employee for the duration of the engagement. You will be eligible if you have worked for a minimum of 5 years. It is a monthly contribution done on your behalf by your employer, which keeps accumulating. The gratuity amount is receivable only on your retirement and pre-maturely only in case of death or permanent disability.
You can use a gratuity calculator in India available on many websites to understand how much approximate amount you will receive. Let us look at how gratuity is calculated and how you can make the best use of it.
Gratuity Calculation
There is no fixed percentage of gratuity stipulated by the Payment of Gratuity Act, 1972. Instead, there are two formulae based on the distinction of the eligibility of the organisation employing you. One formula is for organisations which are covered under the Act as per stipulations, and the other is for employees who are not covered, but their employer wishes to give them a gratuity. A formula is created using different number of days for differentiation. Two important information required for calculation are –
- Number of years of service
- Last drawn salary
1) For employees covered under the Act
The formula stated is, Gratuity= (15* Last salary * Period of active working)/ 26
15 is the salary of half month as advised by the Act. This is multiplied with the number of years of service you have given and your last salary. 26 is the set number of days in a month for an employee under this when the organisation is covered for gratuity.
Previous salary drawn is an addition of Basic salary and Dearness allowance (for government employees) along with sales incentives.
Example – If you worked as a Head of Department for last 10 years and your last salary drawn was Rs. 2 lakhs per month including basic + expenses + sales incentives then your gratuity calculation will be as follows –
Gratuity = (15*200000*10)/26 = Rs. 11,53,846
The number of months is decided as per the nearest integer. If the number of months is below 5 then it is the lower number of years, and if it is above 5 then another year is added. If he had worked for 10 years and 3 months then it would have been 10 years but 10 years and 8 months makes it 11 years of service.
- For employees not covered under the Act but still receiving gratuity
Here your employer is still paying you even if it is not covered under the Gratuity Act.
The formula stated is, Gratuity= (15* Last salary * Period of active working)/ 30
Here the number of working days are advised to be taken as 30 as per the Act.
Tax saving on gratuity amount
The entire amount of gratuity is not tax-free. Only the lowest amount from the below three options will be considered tax-free –
- A pre-decided gratuity amount in your salary package will be compared to the gratuity you are eligible to receive per the formula.
- Rs. 20 lakhs will only be considered as tax-free as this is maximum ceiling mandated by the government.
- If the amount of gratuity calculated as per the formula is the least, then only this portion of your total gratuity amount will be tax-free.
The rest of the amount will be part of your taxable income.
There is another investment option which can be looked at as a means of earning higher than tax cuts.Company FDs earn 1-2% higher than regular bank FDs. Bajaj Finance Fixed Deposit(FD) offers high creditworthiness with 8.95% interest rate for senior citizens. It also provides flexibility to choose tenor ranging from 12 – 60 months. With short tenors, you can protect your gratuity fund against inflation and earn reasonably good returns even when the inflation is at its peak. Also, it is easy to invest and manage multiple FDs using Experia- your online fixed deposit account.
