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:
- The individual must be eligible for superannuation.
- The individual must have resigned from his/her job after continuous employment with the same organization for five years.
- The individual must be retired from his/her job.
- In case of the death of that person, or if he/she becomes disabled due to accident or sickness.
Gratuity Calculation Formula
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.
The process to Calculate Gratuity Online
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 Taxation Rules
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 29th 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?
Ans: The employee who has completed the tenure of five years with one organization is eligible for gratuity. However, this tenure of five years should not have any break in the services of the employee, which means he/she must have a continuous five years service with one company. In addition to this, an employee who is terminated from his/her services from an organization after completing five or more continuous years with the organization is also eligible to get the gratuity.
Q 2: How much time does an employer take to release the gratuity amount?
Ans: According to government norms, the employer has to release the gratuity within 30 days from the full and final settlement date of an employee. However, any delay in this payment makes the employer liable for paying a simple interest on the amount of gratuity from the date that is due until the actual payment date.
Q 3: When does the gratuity amount is payable to an individual?
Ans: An individual can get the amount of gratuity upon:
- Resignation or termination
- Disablement or death due to an accident or disease
- Retirement
- Layoff or retrenchment
- Voluntary Retirement Scheme (VRS)
Note: One is eligible to get the benefits of gratuity only after completing five years of continuous services with one organization. However, in the situation of disablement or death of an employee, this rule is not applied. The legal heir or nominee of the employee gets the gratuity amount as calculated in gratuity calculator.
Q 4: What formula does a gratuity calculator use to calculate gratuity?
Ans: The gratuity calculator uses two different formulas for two different types of employees:
- For Employees Who Are Covered in Gratuity Act, 1972:
- Gratuity = (Last salary drawn * Number of service years completed * 15) / 26
Here the last salary drawn contains Basic Salary and Dearness Allowance both.
- For Employees Who Are Not Covered in Gratuity Act, 1972:
- Gratuity = (Salary last drawn * Number of service years completed *15) / 30
Here the last salary drawn contains Basic Salary, Commission on Sales, and Dearness Allowance.
Q 5: Is it necessary to follow five years of continuous service rule for getting the gratuity amount?
Ans: This rule is applicable in most of the cases except the disablement or death of an employee during his/her service tenure with the company. In this situation, the nominee of the employee gets the gratuity amount as calculated by the gratuity calculator.
Q 6: Is it possible for contractual or temporary employees to get the benefits of gratuity?
Ans: If the organization considers temporary or contractual employees as its employees, then they are eligible to get the amount 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?
Ans: No, that person will not be able to get the benefits of gratuity as he/she has to complete at least 5 years of service. However, if the employee dies during his/her tenure with the organization, then his/her legal nominee or heir is eligible to get the gratuity amount, even if he/she has not completed five years of service. In another case, as per the Madras High Court rule, if an employee has served 240 days in the fifth year of the service with the company, then he/she is eligible to get the gratuity benefits.
Q 8: Does a contractual employee get the gratuity benefits after completing five years in the service?
Ans: If the contractual employee is on the company roll, he/she is regarded as the employee of the company. Therefore, he/she is eligible to get the benefits of the gratuity. However, if he/she works under some contractor who is not related to the company, then it is the responsibility of the contractor to provide a gratuity, not the company.
Q 9: Does the gratuity amount have any upper limit?
Ans: For government employee, the upper limit of gratuity amount is increased to Rs.20Lakh (according to amendments made after the seventh pay commission). However, for non-government employees, the limit of gratuity is Rs.10Lakh only as of now.
Q 10: What are the limitations of income tax for gratuity?
Ans: According to latest notifications from the Indian Government, the relation of income tax with gratuity limit is increased from Rs.10 Lakhs to Rs.20 Lakhs.
Q 11: Is there any facility of nominee available for gratuity amount?
Ans: Yes, there is a facility of nominee available for gratuity and to avail the same a person has to fill Form ‘F’ when he/she joins the company for nominating the beneficiary.
Q 12: The gratuity amount that one receives is taxable in which head of the Income Tax Act?
Ans: The amount of gratuity that one receives upon retirement or when leaving a job in service tenure is taxable in the head of ‘Income from Salary’. The amount that one receives as gratuity is must be shown in the head salaries while one is computing the income tax returns. This rule applies to both private and government employees.
Q 13: Can an organization refuse to pay the gratuity amount, if it is not stable financially?
Ans: An organization is bound to pay the gratuity amount irrespective of its financial condition. It cannot cite any financial loss as a reason to refuse the gratuity payment.