As the name implies, a company pays gratuity to its employees in recognition of their continuous service and hard work. The government attaches the same importance to gratuity as it does for EPF (Employees’ Provident Fund). The right to gratuity has been placed at the same level of primacy in law. The Gratuity Act applies to workers and employees of all establishments that employ 10 or more persons.
The Gratuity Act ensures employees retain the right to better gratuity terms under any agreement or contract. For establishments under the central government’s control or those operating across multiple states, the Centre acts as the regulatory authority.
How do you calculate gratuity
According to the Gratuity Act, there is a formula for the calculation of gratuity. It is a simple and straightforward formula. It goes thus: (Last salary drawn by employee) x (Years of service of the employee) x (15/26).
Last drawn salary includes basic salary and DA (dearness allowance). A month typically consists of 26 working days – this explains the number 26 in the denominator. The number 15 indicates that the calculation is done on the basis of salary of 15 days. Years of service of the employee means the number of years he/she has spent with the company in question. One important point to remember is that rules stipulated that an employee must work for 5 years without a break in order to be eligible for gratuity. However, if an employee expires before the completion of 5 years in service this condition is waived and the amount is paid to the next of kin. So it can be said that the eligibility for gratuity is completion of 5 years of unbroken service.
How much gratuity in 5 years, 10 years
Employing the formula mentioned above, one can easily calculate the gratuity one is entitled to get after a period of say 5 years. Let’s assume for simplicity that the last salary of the worker is Rs 40,000. In the formula let’s substitute:
Last Salary: Rs 40,000
Calculation: Rs 40,000 x 5 x (15/26)
Total gratuity payable to employee: Rs 1,15,384
Now, let’s assume that the employee has completed 10 years of continuous service in a company. Also, let’s assume that the last drawn salary reached Rs 50,000. Therefore, gratuity payable at the end of 10 years of continuous service:
Last salary: Rs 50,000
Calculation: Rs 50,000 x 7 x (15/26)
Total gratuity payable to employee: Rs 2,88,461
Gratuity is a welfare schemes designed for the benefit of formal sector employees that has been uttered in the same breath as Employees’ Provident Fund. Traditionally, it came as a significant sum at the end of the working life of an employee and is free from Income Tax at the hands of the beneficiary. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
