Gratuity Calculator

Gratuity calculator calculates the lump sum amount that a person may get when he/she leaves a job after completing at least five continuous years with an organization.

What is Gratuity Calculator?

A gratuity calculator is a tool to estimate the amount of gratuity that one will earn once he/she leaves a job after completing at least five years in the service of a company. There are many online gratuity calculators available that estimate the amount of gratuity a person will get. The gratuity calculators work on gratuity formula that calculates the gratuity amount concerning the input values such as last drawn monthly income, several years (including the months) in service with the company, dearness allowance, etc.

What is Gratuity?

Gratuity is a lump sum money that a company pays to its employee when he/she leaves the organization after completing five years in it. However, these five years must be continuous and there should not be any gap in the services of the employee with that organization. In this way, gratuity works as a retirement benefit that an employee receives after working for at least five years in a row with a company. According to the Payment of Gratuity Act, 1972, there is a set of certain requirements and rules that are associated with Indian gratuity system.

Eligibility Criteria for An Individual to Receive Gratuity

An individual can receive the gratuity if he/she fits in the following criteria:

1. The individual must be eligible for superannuation.
2. The individual must have resigned from his/her job after continuous employment with the same organization for five years.
3. The individual must be retired from his/her job.
4. In case of the death of that person, or if he/she becomes disabled due to accident or sickness.

Gratuity Formula

The gratuity amount depends upon the tenure of service and last drawn salary. Gratuity Calculation Formula=Number of completed years of service (n)*basic salary last drawn plus dearness allowance (b)*15/26.

One can calculate his/her gratuity amount with the help of the following formula:

• Gratuity = n*b*15/26

Here n= The service tenure completed by an individual in a company.

b = basic salary last drawn by an individual + the dearness allowance

Let us take an example to understand this, suppose a person A is working with a BCD company for 15 years. The last drawn basic salary of that individual with dearness allowance is Rs.30, 000. Therefore:

The gratuity amount = 15*30000*15/26 = Rs. 2, 59, 615

Note: One needs to notice two points here:

• According to the Gratuity Act, the gratuity amount can never be more than Rs.10 lakh. Any excess amount in gratuity is known as ex-gratia.
• If the last remaining months in the last year of one’s employment are more than six months, then it is rounded to the next number. For example, if the service tenure of a person is 15 years and 7 months, then he/she would get the gratuity of 16 years. However, if it happens to be 15 years 4 months, then he/she will get the gratuity of 15 years.

Gratuity Payment

The gratuity payment depends on the below two factors:

• The last salary is drawn
• Total number of service years

No set percentage is provided by the law for calculating the actual gratuity amount that an employee is required to get at retirement or while leaving the organization. The employer can utilize the formula regulated approach for arriving at the result or can as well pay higher than that.

How To Calculate Gratuity:

To calculate the gratuity online, one has to apply the gratuity formula. However, for using this formula an employee has to fall in any of the below categories:

• Those who are covered in Payment of Gratuity Act, 1972.
• Those who are not

For Employees Who Are Covered in Payment of Gratuity Act, 1972:

The gratuity formula in this case is:

Gratuity Amount = (15* Salary Last Drawn * Employment Period)/ 26

Where, the salary last drawn includes the basic salary, commission on sales, and dearness allowance. Let us take an example to understand this:

Example: For instance, the last drawn basic salary of Mr.X is Rs.40, 000/ month and his employment with ABC Company was for 25 years 10 months. In this case, the gratuity will be:

Gratuity Amount = (15 * Salary Last Drawn * Employment Period)/ 26

 Gratuity Amount of Mr.X= (15*40000*26)/26 = Rs.6, 00, 000

Since, the total tenure of service, in this case, is 25 years 10 months which is rounded off to 26 years.

For Employees Who Are Not Covered in Payment of Gratuity 1972, Act

The gratuity formula for those who are not covered in the Payment of Gratuity Act is as follows:

Gratuity Amount = (15 * Salary Last Drawn * Employment Period)/ 30

Here, the amount of gratuity that one gets depends on the half month’s salary for each completed service year. The salary last drawn carries the basic salary, commission on the sale, and dearness allowance.

The 15/30 calculation represents 15 days out of working days of a month which are 30. The total number of service years is rounded down to the closest full year. To understand this, let us take an example:

Example: For instance, Mr.X is working with a firm that does not come under Payment of Gratuity, 1972, Act. However, the basic salary that he last drew was Rs.30, 000/ month and he has served that organization for 24 years 5 months. As per the above gratuity formula for this case:

Gratuity Amount = (15 * 30000 *25)/ 30 = 3, 75, 000

Here, the service tenure is rounded off to nearest year which is 25 years.

In this way, by using any of the above formula (as per the employee), the gratuity calculator will calculate the gratuity.

Gratuity Rules

According to the Payment of Gratuity Act of 1972, an employer holds the right to forfeit their gratuity payment. The employee have completed 5 years and above 5 years of service in a company. There are some rules of Gratuity. Let’s understand rules of Gratuity one by one.

Gratuity Rules

↓

G → 5 Years Continuous Job

R → Only after leaving the Job

A → An Upper Limit

T → Non-Taxable within Limit

U → Relaxation of Period on Death

I → After 10 Employees Rule Applies

T → Employer can give excess amount

Y → Protected against liabilities

After the gratuity calculation, it is time to understand the taxation rules for gratuity. The taxation on gratuity directly depends on the employee type. The employees can briefly be divided into three main categories:

• Employees Who Are in Government Service: Any government employee is eligible to get tax-free gratuity. The total amount that any government employee gets as gratuity is exempted from income tax be he/she is a central government employee, state government employee, or employee of the local authority.
• Employees Covered in Payment of Gratuity Act: The employees whose employers are covered under the Payment of Gratuity Act will get income tax exempted over the last drawn income of 15 days.
• Employees Who Are Not Covered in Payment of Gratuity Act, 1972: The employees whose employers are not covered in Payment of Gratuity Act, 1972 will get income tax exemption from least of the any of the below amounts:
  • 10 Lakhs
  • The actual gratuity amount received
  • Salary of half a month for each year of employment that has been completed by the employee with the employer.

Note: In the latest announcement of Government of India’s interim budget of the year 2019, the bar for the amount of gratuity ceiling is raised to Rs.20 Lakhs from the last limit of Rs.10 Lakhs. This rule will be effective from 29^th March’ 2018 and it will help the employees who are in service with PSUs and those employees who are not covered in the Payment of Gratuity Act.

FAQs on Gratuity Calculator

Q 1: What is the eligibility for gratuity?

Q 2: How much time does an employer take to release the gratuity amount?

Q 3: When does the gratuity amount is payable to an individual?

Q 4: What formula does a gratuity calculator use to calculate gratuity?

Q 5: Is it necessary to follow five years of continuous service rule for getting the gratuity amount?

Q 6: Is it possible for contractual or temporary employees to get the benefits of gratuity?

Q 7: If a person has resigned from his/her job after servicing the company for 4.5 years, will he/she be able to get the gratuity?

Q 8: Does a contractual employee get the gratuity benefits after completing five years in the service?

Q 9: Does the gratuity amount have any upper limit?

Q 10: What are the limitations of income tax for gratuity?

Q 11: Is there any facility of nominee available for gratuity amount?

Q 12: The gratuity amount that one receives is taxable in which head of the Income Tax Act?

Q 13: Can an organization refuse to pay the gratuity amount, if it is not stable financially?