Gratuity is an important financial factor for Indian employees, to be given as a feeling of monetary security during resignation from the job. Understanding gratuity calculation is highly important for both employees and employers for good compliance with legislation and for budgeting improved finances.
The article presents the introduction to gratuity meaning, steps of calculation, and examples for describing the process.
Gratuity Definition
Gratuity is an amount of money provided by the employers to the workers in gratitude for their continuous service. Payment of Gratuity Act, 1972, states that the employee who has gained five years’ continuous service is able to receive gratuity upon resignation, retirement, or superannuation. The provision is exempted in case of the death or disablement of the employee.
Major Influencing Factors of Gratuity Computation
1. Length of Service:
Length of service is an important determinant of gratuity calculation. The longer the length of service, the higher the amount of gratuity payable.
2. Last Drawn Salary:
Last drawn salary comprising basic salary and dearness allowance is an important determinant of the amount of gratuity payable. Other elements like bonuses, allowances, and incentives are not generally considered for the purpose of gratuity calculation.
3. Application of Act:
Payment of Gratuity Act is to be applied to those establishments with 10 or more employees. The gratuity calculation formula could be different in organizations that are not covered by this act, depending upon the company policy.
How to Calculate Gratuity
There are two major formulas that can be utilized for gratuity calculation: one for such employees who fall under the Payment of Gratuity Act and another for those employees who do not fall under the Payment of Gratuity Act.
Calculation of Gratuity under Payment of Gratuity Act based on case law
For workers falling under the Payment of Gratuity Act, it is calculated as follows:
Gratuity = (((Last Drawn Salary × 15 × Tenure of Service))/26
Where:
– Last Drawn Salary = Basic Salary + Dearness Allowance
– Tenure of Service is brought down to the nearest year
For example:
A servant whose last salary was ₹50,000 and who has served 10 years and 7 months. According to the Act, the service tenure is taken as 10 years because only full years are counted.
\text{Gratuity} = \left(\dfrac{50,000 \times 15 \times 10}{26}\right) = ₹2,88,461.54
Gratuity Calculation for Non-Covered Employees
In case of other employees who are not covered under the Payment of Gratuity Act, the formula is modified as follows:
Gratuity = ((Last Drawn Salary × 15 × Tenure of Service))/30
Taxation on Gratuity
Gratuity to government employees is exempted from tax completely. In the case of non-government employees, the minimum of the following is exempted from tax:
– ₹20 lakh (amended in 2019)
– Received gratuity
– Computed gratuity as per Payment of Gratuity Act
Summary:
Knowledge about how to calculate gratuity is required for Indian employees and employers so that they are strictly adhering to the Payment of Gratuity Act, 1972. Gratuity is a monetary benefit provided to employees by way of appreciation for tenure of service. It is computed on the basis of several parameters such as tenure of service and last drawn salary, i.e., basic salary and dearness allowance. Employees under the Act covered under a specific formula are regulated, while uncovered employees are regulated under another formula. In addition, gratuity is taxed differently for government and non-government employees.
In computing gratuity, the employers have to be vigilant in following the regulatory provisions so that they are not faced with legal issues, and the employees have to maintain updated records of their service period and salary structures. Gratuity is not only a statutory perk; it is also an expression of the appreciation of the employer and is vital for post-employment financial planning.
Disclaimer:
The facts and figures presented here are representative in nature. The employers and employees need to verify the applicability and compliance with statutory provisions. Distant vision is required from all financial angles before engaging oneself in activity of calculation and processing of gratuity in the Indian financial economy.