We have all heard about Employees Provident Fund or EPF. But most of us are not familiar with another payment that is often paired with EPF – gratuity.
Only if served for more than 5 years
Gratuity refers to the amount of money paid by an employer to the employee when he/she quits after working for a minimum of 5 years in any organisation. It is often regarded as a gesture of “Thank You” from the part of the employer. It was originally designed as a parting gift at the time of retirement.
If an employee passes away, the nominee of the employee is entitled to receive the amount of gratuity.
Gratuity calculator: A simple formula
Gratuity is calculated following a simple formula.
It is: Number of years served X (last drawn) Basic Salary + DA X 15/26
The 15/26 is a constant factor in the calculation. The numerator 15 denotes half the number of days in a month and 26 is the number of working days in an average month which excludes Sundays.
Therefore, only two amounts have to be known to calculate the applicable amount of gratuity payable to an employee.
A concrete example
Taking a concrete example, let’s assume an employee has worked for 30 years in a company. The last drawn Basic + DA amount is Rs 50,000.
The gratuity payable to this employee will be: Rs 50,000X30X15/26 or Rs 865,384.
Easy to use online calculator
To use the online gratuity calculator is very easy. One, they are free to use.
Two, the user has to just type in the last drawn Basic + DA amount and the number of years of service.
The amount is calculated automatically.
Employer can pay more
An employer can always pay more gratuity than that determined by the above formula to any employee if the management so desires.
When one retires, the number of years of service is rounded off to the next full year if more than 6 months passed in the last year of service.
But if it is less than 6 months, the year is rounded off to the previous whole number.
The legislation that governs Gratuity
Gratuity is governed by the Payment of Gratuity Act, 1972.
Payment of gratuity up to Rs 20 lakh is exempt from Income Tax. It was recently doubled from the earlier ceiling of Rs 10 lakh.
For those not covered by the Act
Even if the employer organisation is not enlisted under the Act, it can pay gratuity. The formula changes slightly.
It becomes (15 X Last drawn salary X Period of Service)/30.
Gratuity benefit was designed as a social security for employees retiring from a company. The rules are simple and the calculator is easy to use. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
