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How To Calculate Gratuity?

IndianMoney.com Research Team | Updated On Wednesday, June 20,2018, 03:29 PM
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How To Calculate Gratuity?

 

 

You work very hard in office and reap the benefits of hard work. You enjoy a high salary, pay hikes and even a bonus. Yes, your boss recognizes the effort put-in and rewards you with perks and benefits. The employer gives you a gratuity, if you complete 5 years of service in your Organization.

What is gratuity? Gratuity is the money given by your boss/employer, for services rendered to the Organization. Gratuity is usually paid at retirement, but may be paid before, if certain conditions are met.

You are eligible for a gratuity, if you complete 5 years of service with your Organization. Employees are paid the gratuity even before 5 years, on disability in an accident or if he suffers from a major disease. On death of an employee, the family gets the money.

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What Is Gratuity?

 

The law has not stipulated any set percentage, for the amount of gratuity your employer needs to pay you. Your employer can use a formula-based approach, or pay you even more than this.

Gratuity depends on two main factors:

The last drawn salary and the years of service.

 

SEE ALSO: Budget 2018: How LTCG Tax Works On Equity Funds?

 

1. How is gratuity payable?

 

To calculate how much gratuity is payable, you need to understand the Payment of Gratuity Act, 1972. This act divides Non-Government employees into 2 types:

 

  • The employees covered under the Act.
  • The employees not covered under the Act.

 

If your Organization has 10 or more employees even for a single day in the last 12 months, you are covered under the Act. If an Organization comes under this Act, this Organization will always remain covered, even if the number of employees falls below 10.

 

SEE ALSO: How To Pay Zero Tax?

 

2. How is gratuity calculated?

 

This formula will help you calculate the gratuity.

Check this formula

(15 * Last Drawn Salary * Tenure of Working)  /  26.

The last drawn salary is the basic salary, dearness allowance and the commission received on sales.

This example will help you calculate gratuity for employees covered under the Act.

Let’s say Mr X has worked for Company ABC and his last drawn salary is Rs 50,000. Mr X has worked in this Company for the last 19 years and 8 months.  We will calculate his gratuity.

= (15 * 50000 * 20) / 26 =  Rs 5,76,923.

Please Note: We have taken 19 years and 8 months as 20 years for the tenure of service, because Mr X has worked for more than 6 months in that year.

This example will help you calculate gratuity for employees not covered under the Act.

Let’s take the same example and consider that Mr X Company, is not covered under the Act. Then take a look at how gratuity is calculated.

= (15 * 50000 * 19) / 30 = Rs 4,75,000.

In this case the number of years of service is taken on the basis of a completed year. Mr X has worked for 19 years and 8 months and the tenure is 19 and not 20 years.

Yes, you have worked hard and are ready to reap the benefits of this hard work. You have earned the gratuity and also learnt how to calculate it. Be Wise, Get Rich. 

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