Gratuity calculation : In the maze of employment benefits, gratuity stands out as a significant yet often misunderstood provision. Recent changes in the tax rules surrounding gratuity have stirred conversations and prompted many to revisit their understanding of this benefit. So, what exactly is gratuity, and how is it calculated? Let’s delve into the details.
Eligibility Criteria for Gratuity
Gratuity is a lump sum payment made by an employer to an employee as a token of appreciation for their service. According to the Gratuity Payment Act of 1972, an employee becomes eligible for gratuity after completing a minimum of five years of continuous service with the same employer.
However, in cases of unfortunate events like death or disability, this requirement is waived, and the nominee or legal heir of the employee becomes entitled to receive the gratuity amount.
It’s important to note that the maximum amount of tax-free gratuity has been revised from Rs 20 lakh to Rs 25 lakh by the government, offering a bit more financial relief to employees upon retirement or resignation.
Understanding Gratuity Calculation
Gratuity calculation follows a simple formula:
Total Gratuity Amount = (Final Salary) x (15/26) x (Number of Years Worked)
To illustrate this, let’s consider an example:
Imagine you’ve been working with a company for seven years, and your final salary, including basic pay and dearness allowance, amounts to Rs 35,000. Plugging these values into the formula:
(35000) x (15/26) x (7) = Rs 1,41,346
This means you’re entitled to receive Rs 1,41,346 as gratuity upon leaving the job.
Deciphering the Calculation
The formula may seem straightforward, but understanding its components is crucial for clarity. The factor of 15/26 represents the fraction of the year used for gratuity calculation. This stems from considering 15 days of work in a month (considering an average of 30 days per month) and 26 working days in a month after excluding Sundays and other holidays.
Additionally, if an employee has served for more than six months in a year, it’s counted as a full year for gratuity calculation purposes. Conversely, if the service period is less than six months, it’s not considered a full year.
Categories under the Gratuity Payment Act 1972
Employees are categorized into two groups concerning gratuity calculations:
Category 1: Covered under the Act Employees falling under the Gratuity Payment Act 1972 are entitled to gratuity benefits as per the formula mentioned earlier.
Category 2: Not Covered under the Act Employees not covered under the Act may still receive gratuity benefits, but the calculation method may vary as per the company’s policies.
Conclusion
Gratuity serves as a significant financial cushion for employees post-retirement or resignation. Understanding its calculation method and eligibility criteria empowers individuals to make informed decisions regarding their financial future. With recent revisions in tax rules expanding the gratuity limit, employees stand to gain more substantial benefits, making it an even more valuable asset in the realm of employee benefits.
