Gratuity Calculation, Gratuity Formula, Rules And Eligibility – All You Need To Know

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Gratuity Calculation

As per 1st February 2019 report, the Government raises the limit for tax-free gratuity from Rs. 20 Lakh to Rs. 30 Lakh. This change was initiated to benefit the employees at the time of their unemployment.

You can use the gratuity calculation formula to estimate your gratuity and to check if the amount is exempted from tax or not. Let us understand the concept of gratuity.

What is gratuity?

A gratuity refers to an amount paid as lump sum money by your employer after you discontinue your services. To be eligible for gratuity, an employee must fulfil some conditions (stated below).

The Gratuity Act came into effect from 1972 and is set to cover employees of the mining industries, plantations, ports, factories and other organisations and industries where there are more than 10 employees. The gratuity amount is contributed by the employer only.

The employer can choose to pay from his profits or have an insurance plan. In case the employer chooses to save gratuity via insurance plans, the employee too can invest in the same via the same scheme. To do so, the employee must know thoroughly what is investment insurance plans.

Features of gratuity

  1. The tax-free limit is up to Rs. 30 Lakh.
  2. The employer has the authority to reject paying a gratuity of an employee if the employee had to discontinue his employment under any grounds of misconduct.
  3. In case of the demise of the employee, the gratuity is paid to the legal heir or the appointed nominee.
  4. You can invest the gratuity amount in various investment or savings schemes to manage your money more effectively.

Who is eligible to receive gratuity?

To be allowed to withdraw gratuity, an employee should meet the eligibility criteria. These include:

  • Employment under the same employer for 5 years or more.
  • Eligible for superannuation.

Besides, an employee can also withdraw gratuity if he retires or suffers from any illness or accidents owing to which he had to retire. Also, in case the employee passes away the gratuity amount will be paid to his legal heirs or appointed nominee.

You can invest your gratuity amount in several investment plans such as you can invest in fixed deposits to earn higher returns.

What is the gratuity formula?

The gratuity is divided into two different categories, such as

  • Employees who are not covered under the Gratuity Act.
  • Employees who are covered under the Gratuity Act.

The gratuity calculation formula for both is different such as:

Employees not covered – (15 X monthly salary X working tenor) / 30

Example 1:

  • A monthly salary of Rs. 30,000
  • Working tenor 15 years seven months

As per gratuity calculation formula, your gratuity amount will be = (15 X 30,000 X 16)/30 = Rs. 2.4 Lakh.

Employees covered – (15 X monthly salary X working tenor) / 26

Example 2:

  • A monthly salary of Rs. 50,000
  • Working tenor 16 years three months

As per gratuity calculation formula your gratuity amount will be = (15 X 50,000 X 16)/26 = Rs. 4.61 Lakh (approximately)

Considering the above two examples, if an individual serves for more than six months as in the case of example 1, the next year is accepted as the total working tenor (15 years and seven months = 16 years). Whereas in example 2, the individual has not completed six months for which the year remains the same (16 years three months= 16 years.)

How to maximise gratuity?

You can consider investing the gratuity amount in investment options like a fixed deposit. NBFCs like Bajaj Finance offer such plans at a competitive interest rate of up to 8.70%.

ICRA and CRISIL are the regulators of the deposited funds, and hence your money is secured. You can make use of fixed deposit calculator to determine your returns well in advance.

While you make such investments, consider knowing what is investment returns to help you create wealth and secure your future. Lastly, to withdraw gratuity, you will have to apply in favour of your employer within 30 days from the payable gratuity date.

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