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    Gratuity Calculation

    • 5 min read
    • Last Modified Date: February 8, 2023
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    Wondering how to do gratuity calculation? After a certain period of service, gratuity is the payment of a lump sum to an employee. It is a reward for long-standing service. It is usually paid upon retirement, but it can be requested if you are changing jobs after a certain period (5 years). The gratuity calculation ot calculator formula works out to be a percentage of your salary.

    What’s the Gratuity Act?

    The Gratuity Act is shorthand for the Payment of Gratuity Act 1972, which was passed in   September 1972. This Act was created to give monetary benefits to employees who have served a long time for one employer. The Gratuity Act applies to all Indian industries and organizations, but certain conditions must be met to qualify for gratuity as per existing Gratuity Act rules.

    What are the gratuity rules?

    India’s gratuity rules apply to employees that are covered under the Payment of Gratuity Act 1972, as well as employees not covered by it. Under existing rules for gratuity eligibility, establishments/companies with 10 or more employees are covered by the Payment of Gratuity Act, 1972. However, it is important to note that the gratuity rules outlined in the Payment of Gratuity Act 1972 do not apply to employees of the Central and State Governments. These employees are subject to their own gratuity payment service rules.

    Eligibility

    Employees are not eligible for gratuity if they have completed five years of continuous service with the same employer. This does not apply to employees who are disabled or die while serving. These rules govern the calculation of continuous service under 1972’s Payment of Gratuity Act.

    Continuous Service

    Days worked

    Assume 1-year of continuous employment

    A place that is less than six days a week, or work in a mine, will be paid 190 days. In any other case, 240 days.

    As little as six months of continuous employment

    95 days for establishments that work fewer than six days per week or in a month. In all other cases, 120 days.

    Considered continuous employment

    No fewer than 75% of the days that the establishment is open when there is seasonal employment.

    Notice: Earned leave, disability leave and maternity leave all count as days worked in this calculation.

    Gratuity Calculation 

    According to the 1972 Payment of Gratuity Act (Petition of Gratuity Act), gratuity is equal to 15 days’ wages for each year of continuous service. It is calculated based on the last drawn income. The gratuity calculator formula works out to be a percentage of your salary.

    Total gratuity payable = (salary drawn monthly) x (15/26) x (number of years of service).

    If you were in the service in 2013, and then resigned in 2018, with a monthly income of Rs 50,000, your gratuity will be (15/26* Rs. 50,000)*5 = Rs. 1,44,230.

    Notice: While there are 31 days in most months of the year, 26 days is the minimum work month as per the Payment of Gratuity Act of 1972. To calculate gratuity, 26 days are used. It is important to note that gratuity in its entirety is exempt from tax.

    Calculator for Gratuity Calculation 

    The gratuity calculation (also known as the “taxable gratuity calculation”) is an easy-to-use tool that allows you to calculate both your gratuity total and the applicable taxable gratuity amount. The online gratuity calculator will help you calculate the gratuity that you will receive at retirement or when you leave your job. However, other factors may affect the final payout. We will now discuss the formula that calculates gratuity.

    Nomination for Gratuity

    After one year of service, an employee must submit a nomination within thirty days. Nominations must be made in the name and surname of one family member. Any nomination that an employee makes in favor of someone else (who isn’t his/her immediate family) will be void.

    The nominee’s interest shall pass to the employee if the nominee dies before the employee. The employee must make a new nomination for such an interest in such cases. Form F is used by the employee to do this.

    Gratuity Payment by the Employer

    The employer must pay the gratuity within 30 days of when it was charged to the employee/employee.

    If the employer fails to pay the amount by the deadline, he can be held liable for simple interest at the same rate as the government.

    The gratuity amount must be paid in cash unless the employee/nominee/legal heir requests a demand draft, bank check, or bank check.

    Gratuity Payment in the Event of Death

    The gratuity payable in the event of the death or disability of an employee should be the following:

    Terms of service

    To be paid

    One year or less

    2x the basic pay

    greater than one year, less than five years

    6 times the basic salary

    Not more than 5 years, but less than 11 years

    12 times the basic salary

    more than 11 but less than 20 years

    20 times the basic salary

    Over 20 years

    Half of the salary is due every 6 months, subject to a maximum of 33 times the salary

    Deductions From Gratuity Amount

    Employees who are forced to leave their job due to the termination of their employment for willful negligence, omission, or damage to the employer’s property, etc. The total loss/damage will reduce the gratuity payout. Employers must take out an insurance policy with LIC (Life Insurance Corporation), to cover their gratuity obligations under the Payment of Gratuity Act of 1972.

    Gratuity Forfeiture

    If the employee is terminated for any of the following reasons, the employer can forfeit the gratuity.

    • His/her lawless act
    • Violent behavior
    • Any disorderly behavior
    • Any offense involving moral turpitude

    must support the fact that the offense was committed while the employee was serving.

    Gratuity Limits

    Gratuity exclusion limit: Rs. 20 lakhs for employees covered by the Gratuity Act of 1972. This limit is applicable for the entire employee’s working life. In case of multiple gratuity payments, the total gratuity exemption limit of Rs. 20 lakhs will apply. 20 lakh, regardless of how many gratuity payments are made.

    Types of Employee

    No Tax Amount 

    Government employees

    Up to 20 lakhs

    Employees who are covered under the 1972 Payment of Gratuity Act

    Employees who are covered under the 1972 Payment of Gratuity Act

    Gratuity Tax

    Gratuity paid under the ‘Payment of Gratuity Law, 1972’

    After determining the tax-free gratuity, the gratuity taxation formula is calculated for employees who are covered under the Payment of Gratuity Act. The minimum of the following is the tax-free gratuity amount:

    • Total gratuity paid
    • Total Gratuity due under the Act
    • Limit Rs. 20 lakhs on Gratuity Tax-Free 20 lakh

    Any gratuity payments received by a tax assessee that exceed the above will be subject to the slab rate.

    Gratuity Tax not under the Gratuity Act

    For employees not covered under the Payment of Gratuity Act, the gratuity formula is tax-free. It is the minimum amount of gratuity paid. The formula and Rs. 10 lakhs are the minimum gratuity payments of Rs 10 lakh.

    The Gratuity Act, of 1972, does not cover gratuity payments to government employees. In this instance, gratuity payments received by government employees are not subject to the Gratuity Act of 1972.

    Download the Gratuity Application Form

    To receive a gratuity, you can fill out a gratuity application form:

    • The Employee (Form 1)
    • Nominee for the Employee (Form J)
    • Legal Heir to the Employee (Form K)

    After the gratuity application form is completed, it must be submitted to the appropriate authorities (i.e., to initiate gratuity payments, the employer must be notified).

    Conclusion

    Gratuity payments can get you your hands on a large sum of money, but you also need to manage them well. One of the best ways to keep your money safe and also grow it is by investing in commercial and residential real estate. These industries have made numerous investors rich within a short time. 

    New-age real estate investment platforms like Assetmonk are top-notch solutions for commercial as well as residential real estate investments. Features like fractional ownership also allow you to invest in a property without buying it outright.

    How to do Gratuity Calculation FAQs

    It is legal for an employer to give an employee extra gratuities. This surplus sum will, nevertheless, be included in the employee’s taxable income.

    The employee’s most recent drawn salary is taken into account when determining the gratuity.

    The most that can be deducted from taxes during an employee’s entire working career is Rs. 20 lakh.

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