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.
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.
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.
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.
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 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
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 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).
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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.