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How To Calculate Your Gratuity?

Know all about gratuity in India, and how you can use the gratuity calculation formula to know your gratuity amount.

<div class="paragraphs"><p>Source:&nbsp;rupixen.com on Unsplash</p></div>
Source: rupixen.com on Unsplash

Gratuity is one of the commonly used terms among employees. It refers to the monetary reward that an employee receives from his employer in recognition of his/her services to the organisation. Gratuity is a part of the employee’s salary component and is given mainly with the objective of providing aid during retirement.

Before we move on to the gratuity formula and calculation, let us understand some important details about gratuity.

Gratuity In India

In India, the payment of gratuity is governed by the Payment of Gratuity Act, 1972. As per the gratuity rules, an organisation can pay this monetary benefit only to those employees who have been employed with them for five years or more. Gratuity acts as a retirement benefit for the employees.

Eligibility For Gratuity

As per the Payment of Gratuity Act, 1972, an employee must satisfy the following criteria to be eligible to receive gratuity:

  • The employee must be eligible for superannuation.

  • The employee must be retired from the job.

  • The employee must have retired or resigned from the organisation after working for at least 5 years continuously.

  • The employee must not have any other full-time employment.

The Act however provides an exception to the 5 years employment criteria in case of death, disability, or sickness of the employee.

Gratuity Calculation

As per the Payment of Gratuity Act, 1972, employees can be classified under two categories for the calculation of gratuity amount:

  • Employees who are covered under the Act

  • Employees who are not covered under the Act

The gratuity calculation formula varies for both categories. However, the basis of gratuity calculation for both remains the same- the employee’s last drawn salary and his/her number of years of service in the company.

Gratuity Formula

To calculate the gratuity amount for employees who are covered under the Act, the following formula can be used:

Gratuity= (n*b*15)/26

Here, ‘n’ is the number of years the employee has completed in the organisation, and ‘b’ is the employee’s last drawn salary, including dearness allowance and any commission on sales.

This gratuity formula is based on 15 days of the last drawn salary for each year of service completed (or part of it exceeding 6 months).

On the other hand, the formula to calculate the gratuity amount for employees who are not covered under the Act is as follows:

Gratuity= n*b*15/30

Here, the employee’s gratuity amount is calculated based on his/her basic salary for half a month. However, you must note that the number of years in this category is considered based on each completed year and is not rounded off.

Income Tax Exemptions on Gratuity

The gratuity that is received by an employee falls under the ‘Income from Salary’ head during taxation and hence is taxable under the Income Tax Act of 1961. However, the gratuity amount up to a certain limit is exempted from tax. This limit is different for government employees, private sector employees who are covered under the Payment of Gratuity Act, and private sector employees who are not covered under the Act.

  • For government employees, the entire gratuity amount is fully exempted from taxation.

  • For private sector employees who are covered under the Act, the maximum amount that can be exempted from taxation tax is the least of the following:

    - The eligible gratuity amount

    - ₹20 lakh

    -The actual gratuity received

  • For private sector employees who are not covered under the Act, the maximum amount that can be exempted from taxation tax is the least of the following:

    - The eligible gratuity amount

    - ₹10 lakh

    - The actual gratuity received