In a literal sense, it is a token of gratitude and appreciation. It's offered to an employee upon termination from their job, for the duties and services provided by them over the years. The specifics about gratuity are subjected to several terms and conditions.
In the past, there used to be no provisions for this kind of mechanism. When someone retires at around age sixty, they deserve some benefits to ensure a smooth retirement. The situation was worse in the case of an unexpected death, serious injuries, or ill-mannered lay-offs.
So, the Payment of Gratuity Act, of 1972 was enacted by the government of India to unify the existing norms and set a standard curriculum for gratuity-related concerns.
What are the Eligibility Criteria for Gratuity Payment?
An employee, to be a beneficiary of this service, must have completed 5 years of continuous service.
- The leaves and other official absences would be taken into consideration while calculating the duration of work.
- The work contract must have been terminated. It can be because of resignation, retirement, lay-off, physical or mental disability, or death.
- In the event of accidental death or any other injuries that inhibit the employee from exercising their duties, the company has to pay the amount irrespective of the duration of service.
- The establishment must have more than 10 employees.
- A year is usually taken as 240 working days. However, it could be different for different circumstances.
Example of Gratuity Calculation
It's calculated based on several aspects, such as:
- Your last drawn salary
- Whether your employer comes under the Payment of Gratuity Act, 1972 or not
- Number of years served
- Other special terms as may have been specified
The usual formula is:
1. n×(15/26)×S; for companies coming under the Payment of Gratuity Act, 1972. The maximum ceiling is ten lakhs.
2. n×(15/30)×S; for companies not covered under the above Act. The maximum amount can be 20 lakhs. Speculations suggest that it could be increased to 30 lakhs in the near future.
Note:
'n' means the number of years of service, rounded up accordingly.
'S' stands for the last drawn salary which is the sum of basic pay and dearness allowances.
The employer is free to go beyond the prescribed amount limit and make its employee happier.
In most cases, a '15-days' wage cycle is followed. However, it could be different for seasonal workers.
The regulation could be a bit different for people working under special or challenging circumstances.
For example:
Let's consider that you have been serving for 10 years and 7 months in a government office. You finish at Rs.90,000 per month (DA included). How much will you get as a gratuity?
Under normal circumstances, it would be equal to 11×(15/26)×90,000 which is Rs. 5,71,154. More than six months is taken as one whole year. So, the number of years = 10+1 = 11.
If you have been working for, let's say, 25 years and 4 months in a PSU or a private sector company, and you retire at Rs.2,00,000 per month, then how much are you liable to be paid as gratuity?
Using the standard formula, it would be 25×(15/30)×2,00,000 which equals to Rs.25 lakhs. But according to the limit, it would be rounded to 20 lakhs. However, the employer can pay 25 lakhs or more, as per other conditions.
How Could a Gratuity Calculator Help You?
There was a time when such calculations were not easy to make. But nowadays, several calculators are available through various platforms. They can help you know the due amount of gratuity. Knowing this sum in advance can ensure fruitful future planning.
It also facilitates the planning of a prosperous after-job life.
Advantages of Using a Gratuity Calculator
Some of the privileges that come with a reliable gratuity calculation system are mentioned below:
- The calculator shows you the gratuity figures instantly.
- It saves a lot of time and energy. You can get it done at lightning speed. Some quick clicks, and that's it!
- It's extremely easy to use because they provide a user-friendly interface. You can use it from the comfort of your couch.
- Data security is taken care of so that you would not have to worry about breaches of privacy.
Note that:
- The results that you get, will depend solely on the data that you input. So, take care to be diligent in that.
- Also, it would be an approximate estimation. It might slightly vary according to any other special provisions.
- Use trusted and reliable platforms to get accurate results.
Taxation Rules Applicable to Gratuity
Taxation has been a vital tool for the government in manoeuvring the fiscal policy of the country; income tax is one of the most important aspec.
ts of it. Although you ought to pay the rightful taxes, at the same time, it would be smart of you to know the exact amount to be paid so that you don't get overcharged.
You must be wondering what would happen to your gratuity lump sum. The money that you could actually spend or invest would be the sum that you get after deducting the taxes from the projected amount. The good news is that there's a relaxing mechanism in place for the taxation of gratuity.
All those who work for the government (centre/state) are exempted from taxation on gratuity. They have a maximum ceiling of ten lakh.
All other employees who are subjected to a maximum ten lakh ceiling on gratuity, are also exempted from taxation.
For some PSUs and private sector employees, which don't come under the Payment of Gratuity Act, 1972, taxation will be exempted for the lesser amount of the following three:
1. The projected amount
2. The actual amount you get paid
3. The maximum ceiling amount: 20 lakhs
For example, let's assume that you are eligible to get 18 lakhs. However, your kind employer offers you 22 lakhs. The ceiling is of course 20 lakhs. In this case, you will be exempted from taxation for 18 lakhs. And, for the remaining 4 lakhs, you will have to pay the income tax as per the respective tax slab.
Thus, the maximum gratuity amount on which you can get a tax exemption is 20 lakhs. It is most likely to be increased further in the coming years.
How Can You Use a Gratuity Calculator?
Gratuity calculators are available on various online platforms, allowing you to access the service from anywhere. All you need is a smartphone or PC/laptop.
Enter all the required information correctly, and you will get to know the estimated gratuity amount.
Most of them provide a user-friendly interface so that you can have a seamless experience.
Make sure you are on a trustworthy platform and have a secure internet connection. The data you will be sharing might be sensitive, so safety protocol must be adhered to.
Note that the results may not be necessarily accurate. It's entirely based on the numbers given by you, so ensure that you input accurate numbers.
Conclusion
Gratuity is a rightful reward that every employee deserves to be gifted for all the hardships that they have been through throughout their employment career. Although all the duties of calculation lie with the employer, you must nonetheless be proactive enough to know where exactly you stand.
A good gratuity calculator will keep you well-informed. With several calculators available across platforms on your mobile/ laptop screen, you can know the amount with utmost ease. Knowing in advance helps you plan your finances by investing the amount wisely and productively for a maximum return.
Frequently Asked Question
Q1. How is gratuity calculated?
For companies under the purview of the Payment of Gratuity Act, 1972, the formula is n×(15/26)×S. The maximum ceiling is ten lakhs.
For establishments not governed by the Payment of Gratuity Act, 1972, it would be equal to n×(15/30)×S. The maximum ceiling, in this case, is twenty lakhs.
The above formulae are the standard ones. They could be slightly different under different circumstances. 'S' means the last drawn salary, which is the sum of basic pay and dearness allowances. 'n' stands for the number of years of service.
Q2. After working for 4 years and 8 months, I resigned from my job. Would I be eligible to receive gratuity?
You have to work for at least five years to be eligible to receive gratuity. Therefore, it's highly unlikely that your employer would pay you any gratuity if you work for any time less than the required period.
However, if it's a case of any severe physical/mental injury because of which you had to resign, then you will be paid the gratuity sum accordingly.
Q3. If an individual is a contract employee, will they receive gratuity on completing 5 years of service?
You must understand that you are not an employee of the company that you are working at. So, that company doesn't have any obligations to you. The third party is your employer.
So, that contractor might pay you if it comes under the criteria. In quite a few cases, they don't maintain valid paperwork with their employees. There are several loopholes that they tend to use to their benefit and hence, you must be careful.
Q4. What is the upper limit on the amount of gratuity that you can receive?
It used to be 10 lakhs for everyone. However, since 2018, there has been an enhancement of the ceiling of gratuity for PSUs and private sector employees. Now it stands at 20 lakhs for them. However, the companies can pay more, as per their wishes and/or other specific norms.
Q5. Is gratuity part of CTC?
It's more of an amount of gratitude given to the employee for a certain period of sincere and valuable service. It's a statutory benefit provided at the end of the job. So, no, it's not part of the CTC.
Q6. Is TDS deducted on gratuity?
TDS is applicable only when the amount exceeds the exemption limit. In all other cases, it is not deducted.