What is gratuity?
Gratuity, derived from the word gratitude, is a sum of money paid by your employer for all the work you have done for them over the period of time. It is usually paid at the time of retirement but can be paid earlier based on certain conditions.
A person is eligible to receive gratuity only if he has completed a minimum of five years of service with an organization. However, it can be paid before the completion of five years at the death of an employee or if he has become disabled due to an accident or disease. There is no set percentage stipulated by law for the amount of gratuity an employee is supposed to receive- an employer can use a formula-based approach or even pay higher than that.
Gratuity paid depends on two factors: last salary drawn and a number of years of service.
What is a gratuity calculator?
A gratuity calculator is something you can use and calculate how much your organization owes you. It gives you an estimate of the gratuity you would receive, after five or more years of continuous service.
The gratuity calculator shows you the gratuity figures in seconds. It helps you plan your finances by investing the gratuity in a smart manner, for a maximum return.
You can use the gratuity calculator from the comfort of your home or practically anywhere to get the gratuity amount.
How to calculate Gratuity amount?
Gratuity is paid based on the number of years you have been in service with your current employer, multiplied by 50% of the last drawn salary.
To calculate how much gratuity is payable, the payment of Gratuity Act, 1972 has divided non-government employees into two categories:
- Employees covered under the Act
- Employees not covered under the Act
Eligibility Criteria to receive gratuity
In order to receive gratuity, you need to be eligible under one of the following criteria. Here is a list to check if an employee is eligible to receive the gratuity amount from a former employer or not:
- should have worked continuously under the employer for a minimum of 4 years and 240 days
- have reached superannuation
- be retiring from the job that has reached the companies retirement age
- passed away, incapacitated/disabled due to an accident or illness
- you have been retrenched or laid off by the company
What is the formula for calculating Gratuity money?
- For employees covered under the Act
There is a formula using which the amount of gratuity payable is calculated. The formula is based on 15days of last drawn salary for each completed year of service or part of thereof in excess of six months.
(15 * last drawn salary * tenure of working) / 26
- For employees not covered under the Act
There is no law that restricts an employer from paying gratuity to his employees even if the organization is not covered under the Act.
The amount of gratuity payable to the employee can be calculated based on half a month’s salary for each completed year. Here also salary is inclusive of basic, dearness allowance, and commission based on sales.
( 15 * last drawn salary * tenure of working) / 30
In case of death of an employee, the gratuity is paid based on the length of service, where the maximum benefit is restricted to Rs 20 lakh
What is the minimum period to work to be eligible to receive gratuity?
4 years and 240 days is the minimum period you should have been with the employer to be eligible for gratuity payment
What is the maximum Gratuity you can receive?
Gratuity Act, under Section 4(3) states that the maximum amount of money that can be paid is Rs.20 Lakhs. Companies can however choose to pay you the complete amount you are due or higher than Rs.20 Lakhs as a moral obligation (ex-gratia). This entirely at the discretion of the company.
Is the number of years of service for gratuity calculation rounded up?
Yes, if you have been working for 6 years and 8 months, your number of years of service will be 7 years. On the other hand, if you worked for 6 years and 4 months, your years of service will be 6 years.
Taxation rules for gratuity
The tax treatment of the gratuity amount depends on the type of employee who has to receive the gratuity.
The amount of gratuity received by any government employee (whether central/state/local authority) is exempt from the income tax.
Any other eligible private employee whose employer is covered under the Payment of Gratuity Act. Here, the least of the following three amounts will be exempt from income tax:
- Rs 20 Lakh
- the actual amount of gratuity received.
- the eligible gratuity.
No, you need to have worked for 5 years (4 years and 240 days minimum) in one company at a stretch
No, you will be able to receive gratuity even if you have taken a sabbatical. The period you were on sabbatical will be considered for Gratuity calculation.
Your employer needs to pay out the gratuity within 30 days of you resigning the organization.
Yes, as long as the contract employee or part time staff is on payroll of the company as an employee, he/she is eligible to receive the gratuity cash
Interns and apprentices are usually not on the records of the company as an employee and receive a stipend instead of a salary. As such they are not eligible for gratuity money.
Yes, if an employee dies, the legal heir can receive the gratuity amount from the employer.
Is there any facility of nominee available for gratuity amount?
Yes, there is a facility of nominee available for gratuity and to avail the same a person has to fill form “F” when s/he joins the company for nominating a beneficiary. An employee can nominate one or more members of his/her family to receive the gratuity amount in the event of the death of the employee.