How is Retirement Gratuity Calculated?

Gratuity is a benefit that an employee receives as a reward for his/her service rendered to the organisation. It is generally paid out as a retirement benefit but can also be paid before that, subject to certain conditions.

Any organization that employs 10 or more employees is liable to pay gratuity. An employee becomes eligible for gratuity only when he/she has completed 5 years of service with the organization. The gratuity amount becomes payable when an employee leaves the organization; this may be due to resignation, retirement or lay-off.In case of death or disability of an employee, the 5-year rule does not apply. In such a case, the gratuity amount has to be paid to the employee’s nominee, irrespective of the duration of service before his/her demise. Generally, contractual workers are not eligible for gratuity.

According to the Payment of Gratuity Act 1972, any organization that has employed 10 or more employees on any day during the past 12 months, is liable to pay gratuity to its employees. The act does not specify any fixed percentage to be paid. However, the employers can make use of a formula to arrive at the gratuity figures. The retirement gratuity calculation of private sector employees falls under 2 categories:

• Employees who are covered by the Gratuity Act

The formula used for retirement gratuity calculation for employees covered by the Gratuity Act is as follows:Gratuity = Last drawn salary x 15/26 x Number of years of serviceHere, last drawn salary is referred to the basic Salary of the employee + Dearness AllowanceFor the purpose of computing, the average salary of the past 10 months is considered. For calculating the number of years of service, 6 months and above is taken as 1 year.

• Employees who are not covered by the Gratuity Act

The formula used for retirement gratuity calculation for employees not covered by the Gratuity Act is as follows:Gratuity = Last drawn salary x 15/30 x Number of years of serviceThe last drawn salary is the basic salary received by the employee + Dearness AllowanceThe only difference here is that the employee is paid for the actual number of years of completed service.In case of death of an employee, the gratuity amount depends upon length of service provided.The maximum amount of gratuity amount payable is capped at Rs.20 lakhs. Gratuity amount that an employee receives is exempt from taxes. To Conclude Gratuity is a retirement benefit that is paid to an employee as a reward for service provided. An employee becomes eligible for retirement gratuity after he has completed 5 years of service with the organization.

A monetary bonus provided by the employer but not included in the regular monthly salary is known as a gratuity. The Payment of Gratuity Act, 1972 governs the gratuity provisions, and it is paid upon the occurrence of any of the following circumstances.

• On superannuation (a worker who attains the retirement age is said to be in superannuation)
• Upon leaving a job or retiring
• The employee must have served a minimum of five years in order to be eligible for gratuity in the event of death or disability owing to accident or disease (the five-year time limit shall not apply in these situations). Interns and contract workers are not permitted to use it.

Every person employed by a plant, oil field, port, railroad, mine, store, farm, establishment, or educational establishment with 10 or more employees on any day over the previous 12 months is eligible for gratuity .

Calculating the amount of gratuity that is tax-exempt for employees that are covered by the Gratuity Act's payment provisions.

The following are all tax-exempt to the extent possible:

• Last salary (basic + Dearness Allowance) x number of employment years x 15/26;
• Rs. 20 Lakhs (that has increased from Rs. 10 Lakhs as per the amendment);
• Actual gratuity amount

Important information:

• For each completed year of service or portion thereof, 15 days of pay based on the salary last drawn, or 15/26.
• The number of service years is rounded up to the next full year.

Even though the company is not covered by the Payment of Gratuity Act, there is no legal prohibition on an employer giving a gratuity to their staff. A half-wage month for each year that has been completed might be used to determine how much gratuity is due to the employee.

Calculating the amount of a gratuity that is tax-exempt for employees that are not covered by the Gratuity Act's payment provisions.

The following are least exempt from tax:

• Average salary over the last 10 months (basic plus DA)* years of employment* 1/2;
• Rs. 10 Lakhs (the growth to Rs. 20 Lakhs is not applicable for workers who are not covered under the Payment of Gratuity Act).
• Actual gratuity amount

Important information:

• The average wage for the past 10 months is taken into account.
• The number of service years is rounded up to the next full year.

You can use this straightforward calculation to determine your gratuity amount .
Gratuity equals the last drawn salary times 15/26 times the number of years of service.Your basic plus DA will make up your most recent drawn compensation. Your service time will be rounded to the nearest full year in order to determine your gratuity.According to the Gratuity Act, your gratuity is equal to 15 days of pay times the number of years you worked. Wage in this context refers to base pay plus a daily allowance.Take the monthly income you were receiving at the time of your resignation or retirement (basic plus dearness allowance). This is divided by 26. You now have access to your daily wage. This sum should be multiplied by 15 days and then by the number of years you have served.Here's an example. Suppose that your average monthly salary is Rs. 26,000. Your daily salary will be Rs. 1,000. Multiply this by 15 and then by 10. The gratuity you are entitled to after 5 years of service will be Rs. 75,000.

Forfeiture of Gratuity

The Payment of Gratuity Act of 1972 states that an employer has the authority to withhold all or part of an employee's gratuity payment, even if the employee has completed five or more years of service. This only functions when the worker has already been fired for disorderly behaviour, such as attempting to damage people physically while on the job.

Schedule for paying gratuities

There are three steps in the gratuity payout process. These consist of:

• An individual or a person with authorization must submit an application to an employer in order to request the gratuity that the corporation owes him or her.
• Recognition and computation: The organisation that owes gratuity will compute the amount as soon as the application is received and will also send a notice of the same to the person and the governing authority with the amount stated.
• Disbursement: After sending the acknowledgement, the employer has 30 days to provide the recipient with their gratuity.

You will earn gratuity if your name is listed on the corporate payroll and you are regarded as an employee. However, if your employment is governed by a separate contract from the business, then the contractor, not the business, should be responsible for paying the gratuity.

Employees of industries, mines, oilfields, plantations, ports, railroad companies, shops, or other institutions connected to them are covered by the Payment of Gratuity Act of 1972. The scope of this statute also extends to all types of government employment. With the exception of Jammu & Kashmir, it is applicable in every Indian state.

Yes. A company cannot pay you a gratuity of more than Rs. 10 Lakhs. This restriction also applies to any gratuities you may get from several employers throughout the course of your career. If your employer wants to give you a bonus or ex-gratia payment, then they may do so.

When you join a company, you must complete Form F in order to choose one or more heirs for your gratuity amount.

Typically, the gratuity is disbursed concurrently with, or shortly before/after, your complete and final payment is made. Employers are required by the government to make the payment within 30 days. If there is a payment delay of any kind, then the employer is required to pay simple interest on the amount from the payment's due date until that date.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.