Using a gratuity calculator can help determine how much gratuity you will earn if you decide to leave your position. It is a valuable tool for workers who intend to retire. The gratuity calculator utilizes a formula that takes many inputs into account. These include the number of years of service, the latest monthly salary withdrawn, and the dearness allowance. The calculator is simple and provides the gratuity amount in only a few seconds. In addition, it is cost-free to use. The calculator also aids in long-term budgeting for a stress-free retirement.
The lump sum payment made by the company to their employee is known as a gratuity. In appreciation for their services, the company pays them this amount at their resignation, termination/layoff, or retirement. The gratuity and its payment procedures are governed by the Payment of Gratuity Act, 1972. An employee must meet specific requirements to be eligible for gratuity payments under this act.
The worker must have been employed by the company consistently for at least five years. The worker cannot work for another full-time employer. The employee is eligible for a gratuity even before the completion of five years in some specific instances such as their death or disability.
The gratuity cannot exceed ten lakhs of Indian rupees. If there is any surplus, it is ex-gratia. The ex-gratia is a gift that is made voluntarily and is not required by law.
The number of months of employment is essential when determining the gratuity. Therefore, if a person worked for more than six months during their last year of employment, the number is rounded in the following manner.
For instance, if a worker has put in 15 years and seven months of work, their years of service will be counted as 16 years. The number of years of service will be 15 years if the employee has worked for 15 years and four months.
The 1972 Payment of Gratuity Act lays out guidelines for calculating gratuities. There are two types of employees under these regulations. Specifically, employees whom the act covers and those who are not covered by the act. The act also specifies requirements for organizations that they must comply with to be covered by the act.
The gratuity is calculated differently for employees who are covered under the act and for those who are not covered under the act.
The formula to calculate the gratuity received by these employees is as follows:
The ‘n’ stands for the number of completed years in service in an organization
The ‘b’ stands for the sum of the employee’s basic salary, dearness allowance, and their commission on their sales if any.
One needs to note that the average number of days in a month is taken as 26, removing four Sundays. The gratuity is calculated at the rate of 15 day wages. Considering an example, Mr. Chopra has worked with his company for 7 years and 3 months. His last pay slip says that his last drawn monthly salary was INR 1,00,000. The total gratuity amount will amount:
As he worked for less than six months in his last year of employment, the number of completed years in his case is seven years.
The formula for these employees is slightly different. Here, the number of days in a month considered is 30, instead of 26. Also, only after the completion of a year, it is considered a part of the employee’s tenure.
For instance, Mr. Reddy has worked with his company for ten years and nine months. His last drawn salary was INR 80,000. His Gratuity will be calculated using the following formula:
The employee must meet the following requirements to be eligible to receive gratuity benefits:
Employees are exempt from the five-year requirement in cases of the individual’s death, incapacity, or illness.
After five years of service, employees are given a lump sum payment as a token of gratitude for their services. Unfortunately, the law doesn’t provide a specific percentage for determining the precise gratuity amount. The amount is contingent on only two factors.
The gratuity amount is computed using these two inputs using the gratuity calculator. You can be paid gratuities in cash, by demand draught, or by a cheque. However, the qualified employee must submit their application within 30 days from the day the gratuity becomes payable. Also, the employer is required to pay the employee within 30 days of the application’s receipt date.
All of India is covered by the Payment of Gratuity Act. Therefore, it is relevant to:
In other words, the Payment of Gratuity Act, 1972 applies to any firm that had ten or more employees on a single day within the previous 12 months.
An employee’s gratuity is taxable under the “Income from Salary” heading. According to the Income Tax Act, the Income Tax department has declared gratuities tax-exempt up to a specific threshold. They vary for government workers, non-government workers who are covered by the act, and non-government workers who are not covered by the act.
For those working for the government, the entire gratuity sum is tax-free.
All employees must adhere to the Income Tax Department’s regulations for filing taxes. The guidelines for submitting taxes are outlined in the Income Tax Act. The income tax calculator can be used to calculate taxes. The online income tax calculator is accessible and uncharged.
Your choice of investment option to invest your gratuity amount depends on your risk appetite. You can invest that amount in real estate by paying it as a down payment for a house or land. If your risk appetite is high and you seek quick returns, you can invest in equities. If you want a safe investment option, it’s better to consider fixed deposits, which give you returns. P2P lending is one of the most promising recent investment opportunities. LenDenClub’s fixed maturity peer-to-peer investment plan (FMPP) offers you returns of up to 10–12%* p.a.. You can invest in FMPP for a flexible investment period, ranging from one to five years. Along with offering attractive returns, the plan also minimizes your risk by hyper-diversifying your investment. But, before investing in any investment opportunity, remember that risk is inevitable and make your choices accordingly.