Employee Gratuity Calculation and information

For Employees Who Are Covered Under the Payment of Gratuity Act, 1972:

The gratuity formula in this case is:

Gratuity Amount = (15* Salary Last Drawn * Employment Period)/ 26

Where, the salary last drawn includes the basic salary, commission on sales, and dearness allowance. Let us take an example to understand this:

Example: For instance, the last drawn basic salary of Mr. X is Rs.40, 000/ month and his employment with ABC Company was for 25 years 10 months. In this case, the gratuity will be:

Gratuity Amount = (15 * Salary Last Drawn * Employment Period)/ 26

Gratuity Amount of Mr. X= (15*40000*26)/26 = Rs.6, 00, 000

Since, the total tenure of service, in this case, is 25 years 10 months which is rounded off to 26 years.

For Employees Who Are Not Covered under the Payment of Gratuity 1972, Act

The gratuity formula for those who are not covered in the Payment of Gratuity Act is as follows:

Gratuity Amount = (15 * Salary Last Drawn * Employment Period)/ 30

Here, the amount of gratuity that one gets depends on the half month’s salary for each completed service year. The salary last drawn carries the basic salary, commission on the sale, and dearness allowance.

The 15/30 calculation represents 15 days out of working days of a month which are 30. The total number of service years is rounded down to the closest full year. To understand this, let us take an example:

Example: For instance, Mr. is working with a firm that does not come under the Payment of Gratuity, 1972, Act. However, the basic salary that he last drew was Rs.30, 000/ month and he has served that organization for 24 years 5 months. As per the above gratuity formula for this case:

Gratuity Amount = (15 * 30000 *25)/ 30 = 3, 75, 000

Here, the service tenure is rounded off to the nearest year which is 25 years.

In this way, by using any of the above formulas (as per the employee), the gratuity calculator will calculate the gratuity.

So, the gratuity payment depends on the below two factors:

• The last drawn salary
• Total number of service years

No set percentage is provided by the law for calculating the actual gratuity amount that an employee is required to get at retirement or while leaving the organization. The employer can utilize the formula-regulated approach for arriving at the result or can as well pay higher than that.

Gratuity Rules

According to the Payment of Gratuity Act of 1972, an employer holds the right to forfeit their gratuity payment. The employee has completed 5 years and above 5 years of service in a company. There are some rules of Gratuity. Let’s understand the rules of Gratuity one by one.

• In the latest announcement of the Government of India’s interim budget of the year 2019, the bar for the amount of gratuity ceiling is raised to Rs.20 Lakhs from the last limit of Rs.10 Lakhs. This rule will be effective from 29th March 2018 and it will help the employees who are in service with PSUs and those employees who are not covered in the Payment of Gratuity Act. 
• This limit upper limit for gratuity amount is increased for government employees only and for non-government employees, the rule remains the same, i.e. the gratuity amount can never be more than Rs.10 Lakhs. Any excess amount in gratuity is known as ex-gratia.
• If the last remaining months in the last year of one’s employment are more than six months, then it is rounded to the next number. For example, if the service tenure of a person is 15 years and 7 months, then he/she would get the gratuity of 16 years. However, if it happens to be 15 years 4 months, then he/she will get the gratuity of 15 years.

Taxation Rules for Gratuity Calculation

After the gratuity calculation, it is time to understand the taxation rules for gratuity. The taxation on gratuity directly depends on the employee type. The employees can briefly be divided into three main categories:

1. Employees Who Are in Government Service:

   Any government employee is eligible to get a tax-free gratuity. The total amount that any government employee gets as gratuity is exempted from income tax be he/she is a central government employee, state government employee, or employee of the local authority.

2. Employees Covered in Payment of Gratuity Act:

   The employees whose employers are covered under the Payment of Gratuity Act will get income tax exempted over the last drawn income of 15 days.

3. Employees Who Are Not Covered in Payment of Gratuity Act, 1972:

   The employees whose employers are not covered in the Payment of Gratuity Act, 1972 will get income tax exemption from least of the any of the below amounts:

   • 10 Lakhs
   • The actual gratuity amount received
   • Salary of half a month for each year of employment that has been completed by the employee with the employer.