Gratuity is a systematically calculated sum of money paid to an employee by the employer-company as an appreciation for the continued work they have put into their organisation. To be eligible for Gratuity, you have to have worked in an organisation for a tenure of at least 5 years. Read on to know more.

When is it given?

Gratuity is generally received during retirement or while leaving a company after a long service period. However, in cases of unforeseen death, while working in the organisation, a certain amount of the Gratuity is paid to the dependents of the deceased employee. The concept of Gratuity was legalised in the year 1972, giving us the Payment of Gratuity Act, 1972.

Employees covered under the Act

If the organisation has employed at least 10 people on a single day within the last 12 months, then the employees are considered to be covered under the Act. If later on, the company doesn’t employ 10 people at once, still it will remain being covered under the Act.

Employees not covered under the Act

Those companies not meeting the criterion of the ‘Employees covered under the Act’ clause can also pay Gratuity to their long-term employees. There is no law stopping them from showing their gratitude towards their employees.

Calculation of Gratuity

The Gratuity calculation takes:
  • 15 days of each year you have worked
  • Your last drawn basic salary
  • The tenure of your employment with that particular company
Now, the calculation of Gratuity varies depending on whether you are an ‘Employee covered under the Act’ or otherwise. Let’s consider the following scenario for easier understanding, suppose:

Your last drawn basic salary = Rs.30,000
Tenure of work in that particular company = 30 years
Number of working days in a month is considered = 26 days for employees covered under the Act / 30 days for employees not covered under the Act

Calculation for ‘Employees Covered Under The Act’

(No. of Days of each year x last drawn basic salary x tenure) divided by no. of working days in a month = Gratuity Amount

In figures,
(15 x 30000 x 30)/ 26 = Rs. 5.19 lakh

Calculation for ‘Employees Not Covered Under The Act’

(No. of Days of each year x last drawn basic salary x tenure) divided by no. of working days in a month = Gratuity Amount

In figures,
(15 x 30000 x 30)/ 30 = Rs. 4.50 lakh

Important to Know
According to the Payment of Gratuity (Amendment) Act, 2018, Gratuity now has an increased capping of Rs. 20 lakh, instead of the previous capping of Rs. 10 lakh. Gratuity received up to the full amount of Rs. 20 lakh is tax-free.

To sum up
Gratuity serves as a corpus-enhancer at the end of one’s long term service at a company. The longer the period of service, the higher is the gratuity amount. It is vital to know the calculation of Gratuity so that you can plan a well-informed future confidently. Gratuity is a company’s way of thanking you for your unwavering loyalty towards it.

Learn more about Mutual Funds for a good personal financial management.

DISCLAIMER

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.



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