Gratuity calculator and how to calculate Gratuity!
What is a gratuity?
Gratuity is a component of salary that not many people are aware of. Gratuity is a part of salary received by an employee from their employer in return for the services offered to the company. It is more of a retirement benefit and social security benefit received by the employee when they are leaving their job. Gratuity is provided to government employees and employees of the private sector and is tax free. An employee becomes eligible for gratuity when they complete 5 years of service or full time service with the same employer.
Who pays the gratuity?
The gratuity is paid by the employer and unlike in EPF, the employee doesn’t have to contribute in gratuity. The employer can either pay from their own fund or seek the help of a life insurer and purchase a group gratuity plan. In case of a group gratuity plan, the employer should make annual payments to the insurer and the employee can make contributions to gratuity in this case but it is not mandatory.
How to calculate gratuity in India?
Calculating Gratuity is not hard. Every salaried employee who works for a private or a government sector is entitled to receive gratuity. The employer can pay as much gratuity as they want but there is a minimum gratuity amount that they must pay to the employee. Tax concession is available on the gratuity if it’s in accordance with the gratuity formula and it is taxable if it exceeds the formula.
The formula for gratuity payment is different for people who are covered under the gratuity act and for those who aren’t. Given below is the formula for gratuity payment for both the categories.
Formula for gratuity payment for employees under gratuity act- Any employee that works in a place consisting of more than 10 employees will be covered under the gratuity act. Your last drawn salary and period of service are the two most important factors upon which the formula for your gratuity payment is calculated. Given below is the formula for gratuity calculation for those covered under the gratuity act.
Gratuity = Number of years * Last drawn salary of 15 days
= Number of years * 15/26*monthly salary
Formula for gratuity payment for employees who are not covered under gratuityact- It is not compulsory to pay gratuity for companies that don’t fall under the gratuity act. But, an employer can always choose to give gratuity to the employee for their service. The gratuity given will be completely tax free. Even in this case, the employee can calculate the gratuity in advance even though the the formula is different for this one. Given below is the formula for the calculation of gratuity for employees who are not covered under the gratuity act.
Gratuity = One day Salary * 15* length of service
= (Average salary of last 10 months/30) * 15 * completed years
= Average Salary of last 10 months * Completed years * 15/30
= Average Salary of Last 10 months * completed years *1 /2
=Half of the 10 month average salary * Completed years
One can use the online gratuity calculator to calculate their gratuity in advance. This tool is very easy to use and is free of charge. One has to provide few details such as Basic Salary, Dearness allowance, Length of service in years and months to calculate the gratuity.
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