Every person who works in a company or organization for a long time needs financial security after retirement. Gratuity is a benefit given to employees at the end of their service. This is a kind of thanks that the company gives to its employees for their service. In India, the provision of gratuity payment has been made under the “Payment of Gratuity Act, 1972”.
In this article, we will tell you what gratuity is, how it is calculated, and how you can find out for yourself how much money you will get after retirement. Besides, we will also explain to you the important terms and conditions related to it. If you want to know what is the gratuity formula and how is it implemented, then this article is only for you.
What is gratuity? (What is Gratuity?)
Gratuity is a financial benefit that an employee receives after his long service. This benefit is available only to those employees who have worked in a company for at least 5 years or more.
This amount is given by the company to the employee on the basis of his period of service and final salary. There is a provision for gratuity in both government and private sectors.
Key Facts About Gratuity
- Who gets it?
Gratuity is given to those employees who have worked continuously for 5 years or more in a company. - Legal Provisions:
This benefit is given in India under the “Gratuity Payment Act, 1972”. - service period:
The longer the service period of the employee, the higher the amount of gratuity. - Last Salary:
Gratuity is calculated based on the employee’s last salary (Basic Salary + DA).
Gratuity Calculation Formula
The following formula is used to calculate gratuity:
= × ×1526
,
26
× ×15
Understand the formula:
- Final Salary: Basic Salary + Dearness Allowance (DA)
- Years of Service: The number of years the employee has worked for the company.
- 15/26: This is a fixed ratio which reflects the salary of 15 days of every month.
Example: Gratuity Calculation
Suppose:
- Last monthly salary: ₹50,000
- Service period: 20 years
So the calculation will be:
=50,000×20×1526=₹5,76,923
,
26
50,000×20×15
=₹5,76,923
Thus, in this example the employee will receive a gratuity of ₹5.77 lakh on retirement.
Main terms and conditions related to gratuity
- Rule of service period:
It is mandatory to work continuously in the same company for at least 5 years. - Maximum limit:
At present the maximum limit of gratuity has been fixed at ₹20 lakh. - Voluntary Retirement:
Even if the employee takes voluntary retirement, he will get the benefit of gratuity. - Death or Disability:
If an employee dies or becomes disabled then this benefit will be given to his family. - Tax Exemption:
For government employees, the entire gratuity is tax-free while for private employees, there is tax exemption to some extent.
Gratuity Scheme Overview
| Speciality | Description |
| name of the scheme | Payment of Gratuity Act, 1972 |
| effective date | September 16, 1972 |
| Eligibility | Minimum 5 years service |
| maximum limit | ₹20 lakh |
| basis of calculation | Final salary and service period |
| tax exemption | Government: Completely tax-free; Private: Limited |
| Applicable to whom | both government and private sector |
| management | by the employer |
How to calculate gratuity yourself?
You can easily calculate your gratuity by following the steps given below:
- Find your last monthly salary (Basic + DA).
- Count your service period in whole years.
- Use the formula above:
- = × ×1526
- ,
- 26
- × ×15
- If your service period is incomplete in months then round it to the nearest year (6 months or more will be considered as a complete year).
- Get information about tax exemption and decide your amount.
Gratuity related benefits
- Financial security: After retirement, a lump sum amount is received which maintains financial stability.
- Tax exemption: Getting tax exemption makes this benefit even more attractive.
- Family Security: The family gets financial support in case of death or disability.
- Motivation: Employees are motivated to remain associated with the company for a long time.
Frequently Asked Questions (FAQs)
1. Will I get gratuity even if I leave the job?
If you have completed 5 continuous years in the company, you will get gratuity even after leaving the job.
2. Do contract employees also get gratuity?
Yes, if the contract employee has worked in an organization continuously for 5 years, then he is also eligible.
3. Do part-time employees also get this benefit?
No, part-time employees typically do not receive this benefit because they are not regular employees.
Disclaimer
This article has been written for informational purposes only. “Gratuity Payment Act” is a de facto and legally recognized scheme. The information given in it is based on correct and authentic sources. However, check with your employer or financial advisor before making any financial decisions.