With 10 years of service, you can build a substantial corpus of lakhs of rupees through gratuity. This retirement benefit is an invaluable reward based on your final salary and length of service. Under the Payment of Gratuity Act 1972, you can receive up to ₹20 lakh tax-free. Let’s understand every aspect of this powerful financial right and find out how much this amount will amount to in your case.
What is Gratuity
Gratuity is considered a reward for long-term service. It is a lump sum payment given by the employer to an employee upon completion of five years or more of service.
When is gratuity paid
Gratuity is paid when the employee has completed at least five years of continuous service (or, in some cases, four years and 240 days). This amount is paid upon retirement (at the age of 58), resignation, or in the event of the employee’s death or permanent disability. It’s crucial to note that the five-year requirement is waived in the event of death or disability. The gratuity rule applies to all companies employing 10 or more employees. The employer must pay this amount within 30 days; otherwise, interest of up to 7% may be charged.
Formula for Building a Fund Worth Lakhs
Gratuity is calculated using a simple formula, which you can calculate from home.
Gratuity Calculation Formula
(15 × Last Salary × Years of Service) / 26
Here, last salary refers to the sum of basic pay and DA (dearness allowance). When calculating years of service, if your service period exceeds six months, it is counted as the next full year. Currently, the maximum limit for gratuity is ₹20 lakh.
Calculation on a ₹75,000 salary
Suppose an employee’s basic salary is ₹75,000 and DA is zero. If they have served for 10 years, their gratuity, according to the formula, would be ₹4,32,692. Similarly, if their DA is 20% (i.e., total salary is ₹90,000) and they have 10 years of service, the gratuity comes to ₹5,19,231. This entire amount is tax-free and provides a strong source of financial security. This amount is received as a tax-free lump sum payment at the time of retirement.
What do the rules about receiving gratuity
Gratuity, in simple terms, is a gift and a right for an employee’s hard work and loyalty. To receive this, you must take certain precautions. A minimum of five years of service is mandatory. This rule is irrevocable except in the case of death or disability. You should contact your employer for exact information about your company’s gratuity rules.