How to Calculate Gratuity: Essential Insights for Employees and Employers

Gratuity is a pivotal component of the employee benefits structure in India, serving as a token of appreciation from the employer for the employee’s long-term service. Understanding how to calculate gratuity is vital for both employers and employees to ensure a smooth financial relationship and avoid any potential disputes.

 Gratuity Meaning

Gratuity Meaning is a monetary benefit provided by an employer to an employee upon resignation, retirement, or death. This benefit is guided by The Payment of Gratuity Act, 1972. It aims to offer financial support to employees who have provided at least five years of continuous service. This financial remuneration is not just a token of gratitude but a statutory right of the employee.

 How to Calculate Gratuity

The calculation of gratuity is determined using a standard formula. The formula differs for employees under the purview of the Gratuity Act and those outside it.

 Employees Covered Under Gratuity Act

For employees covered under The Payment of Gratuity Act, the formula is straightforward:

Gratuity = (Last drawn salary ÷ 26) × 15 × Number of years of service

Where:

– Last drawn salary includes basic salary and dearness allowance (DA).

– 26 represents the number of working days in a month.

– 15 is the number of days considered for gratuity wage calculation for every completed year of service.

Example Calculation:

Suppose an employee named Rajesh has a last drawn salary (basic salary + DA) of ₹50,000 per month and has completed 20 years of service. Here’s how you would calculate his gratuity:

Gratuity = (₹50,000 ÷ 26) × 15 × 20

= ₹1923.08 × 15 × 20

= ₹5,76,923

Thus, Rajesh will receive ₹5,76,923 as gratuity.

 Employees Not Covered Under Gratuity Act

For employees not covered under The Payment of Gratuity Act, the formula slightly changes:

Gratuity = (Last drawn salary ÷ 30) × 15 × Number of years of service

The key difference lies in the use of 30 days instead of 26 days in the formula.

Example Calculation:

Assume an employee named Priya has a last drawn salary (basic salary + DA) of ₹60,000 per month and has completed 25 years of service. Here’s the calculation:

Gratuity = (₹60,000 ÷ 30) × 15 × 25

= ₹2000 × 15 × 25

= ₹7,50,000

Hence, Priya is entitled to a gratuity amount of ₹7,50,000.

 Taxation on Gratuity

The taxation on gratuity is determined by the employee’s status as a government or non-government employee.

 For Government Employees

Gratuity received by government employees (central, state, or local) is fully tax-exempt.

 For Non-Government Employees

For non-government employees, the least of the following three amounts is exempt from tax:

1. Actual gratuity received.

2. ₹20,00,000.

3. 15 days’ salary for each completed year of service based on the Last drawn salary.

Suppose an employee receives a gratuity of ₹12,00,000 after 25 years of service, and based on the calculation, the 15 days’ salary for each completed year is ₹10,00,000. The exempt amount, in this case, would be the least of ₹12,00,000, ₹20,00,000, or ₹10,00,000, making ₹10,00,000 tax-exempt, and the remaining ₹2,00,000 taxable.

 Key Considerations for Employers and Employees

– Eligibility: Ensure that the employee has completed a minimum of 5 years of continuous service.

– Calculation Basis: Maintain detailed records of the employee’s last drawn salary and length of service.

– Tax Implications: Understand the tax exemptions available under current taxation laws.

 Conclusion

The calculation of gratuity involves a methodical approach, with specific guidelines dictating the benefits employees are entitled to. For employers, it is imperative to comply with the regulations to foster a trustworthy and legally compliant workplace environment. For employees, understanding how to calculate gratuity can help in financial planning and ensuring rightful benefits.

 Summary:

Gratuity is a crucial financial benefit owed to employees who have completed at least five years of continuous service. The calculation involves different formulas depending on whether the employee is covered under The Payment of Gratuity Act, 1972. For covered employees, the formula is:

Gratuity = (Last drawn salary ÷ 26) × 15 × Number of years of service.

For non-covered employees, the formula is:

Gratuity = (Last drawn salary ÷ 30) × 15 × Number of years of service.

Tax exemptions also vary based on government or non-government employee status. Employers must maintain precise records to ensure compliance and fairness. Understanding these calculations helps both parties navigate their financial obligations and expectations confidently.

Disclaimer: 

This article is meant for informational purposes only. Gratuity calculations and tax implications can vary based on individual circumstances and regulatory changes. It is advisable to seek professional guidance and thoroughly understand the rules before making any decisions related to gratuity.