Quick Summary
Are you an employee who has completed his/her 5 years of continuous service? If yes, then you are eligible for gratuity in such a case. Understanding how to calculate gratuity ensures you receive the deserved financial benefit for your dedicated years of employment. Or are you an employer, wondering how to calculate gratuity? Before moving on to the steps to calculating gratuity, it is important to know all about it.
Calculating gratuity is crucial for both employers and employees. For employers, it is to ensure that they provide the employees with lawful benefits. For employees, understanding gratuity calculation ensures they receive their entitled amount, aiding in retirement planning.
This article will cover the factors affecting gratuity, legal requirements for employers, and common calculation mistakes to avoid, providing a comprehensive guide on how to calculate gratuity accurately.
A gratuity or tip is a form of employee benefit that an employer pays to its employee. It is a part of your salary breakup structure. This is paid as a way of appreciation for their service. It is a payment that is given at the time of retirement, resignation, or death.
Gratuity is a main part of an employee’s compensation package. It is calculated based on the employee’s last drawn salary. It also takes into account years of service completed by the employee.
The Payment of Gratuity Act, 1972, is a law in India that governs the payment of gratuity. As per the act, employers pay gratuity to their employees. But only those who have completed five years of continuous service. This applies to factories, mines, oilfields, plantations, ports, railways, and shops, among others.
How to calculate gratuity depends on many factors, mainly the employee’s last drawn salary. It also includes years of service completed by the employee. Along with the maximum amount of gratuity that can be paid to an employee as per the Payment of Gratuity Act, 1972. While calculating gratuity, employers need to adhere to the legal provisions.
To calculate gratuity, use the Gratuity Calculation Formula mentioned below:
Gratuity = (15/26) x Last Drawn Salary x (Number of Completed Years of Service)
Let’s say, the employee’s last drawn salary is Rs. 50,000 per month, and they have completed 20 years of service. Then the gratuity amount they will get would be:
Gratuity = (15/26) x 50,000 x 20 = Rs. 14,42,307.
Please note that the maximum amount of gratuity to be paid to an employee is Rs. 20 lakhs. Any amount exceeding this limit is not eligible for tax exemption.
Here, “Last Drawn Salary” refers to the employee’s basic salary plus Dearness Allowance. It also includes any other fixed allowance that the employee may be entitled to.
“Number of Completed Years of Service” refers to the total number of years that an employee has worked for the firm This also includes any fraction of a year.
The term “15/26” is a constant factor used to calculate the gratuity amount. The factor of 15/26 is that an employee works for 26 days a month. Thus, completing 15 years of service. Hence, the fraction 15/26 is used to calculate the gratuity amount for each year of completed service.
The factor of 15/26 is used to ensure that the gratuity amount is calculated fairly. All this is based on the last drawn salary and years of service completed by an employee. It is a standard factor used in the calculation of gratuity as per the Payment of Gratuity Act, 1972.
Please note that the factor of 15/26 can be adjusted based on the number of days an employee works in a month. It could also be done in terms of the number of years of service completed.
For example, in the case of seasonal employees, the number of days worked in a year is 240 days instead of 365 days. In such cases, the factor of 15/26 is multiplied by 240/365 to calculate the gratuity amount.
The Gratuity Calculation Formula for seasonal employees is as follows:
Gratuity = (15/26) x Last Drawn Salary x (Number of Completed Years of Service) x 240/365.
The calculation of gratuity amount in a private company is based on the same formula.
In gratuity calculations, 15/26 refers to the fraction of a month that is used to determine the gratuity amount for an employee who has worked for part of a month.
For example, if an employee has worked 15 days out of a 26-day month, the fraction 15/26 is applied to calculate their gratuity for that period. This fraction ensures that the gratuity is proportional to the actual days worked in the month.
Gratuity tax treatment varies by employee type: private sector employees have a tax exemption limit of ₹20 lakhs, with amounts above this subject to income tax based on the applicable tax slab. For instance, if an employee receives ₹25 lakhs, the tax applies to the ₹5 lakhs exceeding the limit.
Government employees, however, receive full tax exemption on their gratuity, provided they have completed at least five years of service. The ₹20 lakhs limit is cumulative across all employers, meaning any amount exceeding this from multiple employers will be taxable.
Employers must follow legal guidelines for accurate gratuity calculation and payment, and employees should be aware of potential tax implications to avoid surprises.
Related Read: How to Calculate HRA in Salary
Employers are responsible for calculating the gratuity amount. And then paying it to their employees in a timely and accurate manner. Yet, mistakes can happen, and employers need to be aware of these common errors to avoid them. Here are some common mistakes and how to avoid them:
Also Read: Understanding the Salary Slip
Gratuity is a key component of an employee’s compensation, governed by the Payment of Gratuity Act of 1972 in India. It is calculated based on the employee’s last drawn salary and years of service. While private sector employees can receive a tax exemption on gratuity up to ₹20 lakhs, government employees enjoy full tax exemption.
Employers must adhere to legal guidelines for accurate gratuity payments. Understanding gratuity calculation and taxation helps employees plan their finances and ensures employers comply with legal requirements.
Want to explore helpful techniques to save and grow your hard-earned money? Dive into our guide on Budgeting.
The formula for calculating gratuity is as follows:
“Gratuity = (15/26) x Last Drawn Salary x (Number of Completed Years of Service) x 240/365.”
Gratuity in India is typically calculated based on 15 days of wages for every completed year of service, provided the employee has worked for 5+ years. The formula is:
Gratuity = (15/26) x Last Drawn Salary x (Number of Completed Years of Service) x 240/365.
The max limit is ₹20 lakh as of now.
The gratuity calculated is 26. The formula is “Gratuity = (15/26) x Last Drawn Salary x (Number of Completed Years of Service) x 240/365.”
Yes, gratuity is calculated based on the employee’s last drawn basic salary and dearness allowance (DA). The formula is:
“Gratuity = (15/26) x Last Drawn Salary x (Number of Completed Years of Service) x 240/365”.
To calculate gratuity manually:
1. Formula: “Gratuity = (15/26) x Last Drawn Salary x (Number of Completed Years of Service) x 240/365”
2. Steps:
i) Identify last drawn basic salary & DA.
ii) Multiply by 15 (days).
iii) Multiply by years of service.
iv) Divide by 26 (working days in a month).
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Chegg India does not ask for money to offer any opportunity with the company. We request you to be vigilant before sharing your personal and financial information with any third party. Beware of fraudulent activities claiming affiliation with our company and promising monetary rewards or benefits. Chegg India shall not be responsible for any losses resulting from such activities.
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