Gratuity is a lump sum payment that an organisation makes to appreciate the employee's contributions to the company. Gratuity is a part of the employee's gross salary and is payable only after they have completed five or more years of service with the company. However, gratuity is also paid before the completion of five years if an employee gets injured and disabled in an accident or due to a disease. Gratuity is covered under the Payment of Gratuity Act of 1972.
What is a Gratuity Calculator?
A gratuity calculator is an online tool that you can use to calculate the gratuity due from your service in the company. This can help you plan for your future better, whether it is retirement or any big expenses.
You just need to fill in the following details to calculate gratuity:
- Monthly Salary (Basic + DA): Last drawn salary (Basic salary plus Dearness Allowance) from your company.
- Years of Employment: Number of years you worked in the company.
Based on these details, the gratuity calculator will do the required calculation automatically and show you the final gratuity amount.
Here are a few things an employee must note while calculating gratuity:
- An employee is eligible to receive up to ₹20 lakh as gratuity following retirement, resignation or death. However, an employer can choose to pay more than this cap.
- Number of years of service are rounded off to the nearest single digit. Anything over six months is rounded off to the next number. For example, if you have worked for 12 years and 8 months, it will be rounded off to 13 years.
How to Use INDmoney Gratuity Calculator?
Using the INDmoney gratuity calculator is super easy. You can use INDMoney’s free online gratuity calculator to quickly estimate the gratuity you're entitled to. You have to follow only two steps to get the gratuity amount:
1. Open the INDmoney Gratuity Calculator. You can access it online from your smartphone or computer.
2. Enter your salary (Basic + DA) and years of service
That’s all! The calculator will show the final gratuity amount instantly.
Calculation of Gratuity With Examples
Gratuity can be calculated using a simple formula but it differs slightly when employers are covered under the Payment of Gratuity Act, 1972 and those who are not:
1. Employer covered under Gratuity Act
Gratuity = Number of years of employment x last drawn salary x 15/26
If an employee has been working for a company for 10 years and the last drawn basic salary including DA is ₹10,000, then the gratuity amount will be:
Gratuity Amount = 10 x 10000 x 15/26 = ₹57,692
Note: In this case, gratuity calculation considers the number of working days in a month as 26 days and estimates wages at a rate of 15 days.
2. Employer not covered under Gratuity Act
Gratuity = Number of years of employment x last drawn salary x 15/30
If an employee has been working for a company for 10 years and the last drawn basic salary including DA is ₹10,000, then the gratuity amount will be:
Gratuity Amount = 10 x 10000 x 15/30 = ₹50,000
Note: In this case, gratuity is paid according to the half-month salary on each completed year of service.
Advantages of Using a Gratuity Calculator
A gratuity calculator is easy to use and offers several benefits:
- Accurate Calculation: It lets you know the exact gratuity amount you are eligible to receive from your employer.
- Simple Inputs: It only requires you to enter your salary and years of service in the company. Based on these inputs, the gratuity calculator will show you the final gratuity value.
- Time-Saving: The gratuity calculator saves you from using the complicated gratuity calculation formula. It uses the formula and shows you the gratuity amount instantly.
- Financial Planning: If you plan to keep working for a long time in the same company, you can use the gratuity calculator to do proper financial planning.
Knowing your gratuity amount beforehand will help you to plan your finances in a better way. You can use a gratuity calculator for this purpose and know your gratuity value instantly.
Taxation Rules for Gratuity
Taxation on gratuity payments varies depending on the type of employee receiving the payment:
- Government Employees
Gratuity payments to government employees at any level or post are entirely tax-exempt.
- Private Employees
For a private employee, the least of the following three amounts will be exempt from income tax if the employer is covered under the Payment of Gratuity Act, 1972:
- Maximum amount payable of ₹20 lakh
- Actual gratuity amount received
- Number of years of employment x last drawn salary x 15/26
In case the employer is not covered under the Payment of Gratuity Act, 1972, an employee can avail income tax exemption for whichever amount is the least:
- ₹200,000 which is the capped limit
- Actual gratuity received
- Number of years of employment x last drawn salary x 15/30
Where can you invest Gratuity Amount?
When you receive your gratuity as a lump sum, you can invest it wisely to generate good returns. Consider some smart options to invest your gratuity such as:
Fixed Deposits: While rates may vary, FDs can offer stable returns over a fixed period.
Mutual Funds: Diversify your investment across stocks, bonds, or both, via mutual funds managed by professionals to potentially earn higher returns.
Stocks: Invest in shares of companies you believe in for long-term growth potential.
Real Estate: Consider property investment if you're looking for tangible assets and potential rental income.
Gold: Considered a traditional hedge against inflation, gold can add stability to your portfolio.
Remember, every investment comes with its own risks and rewards. Choose wisely based on your financial goals, risk tolerance, and time horizon. Consult your financial advisor before making any investment decision.
Frequently Asked Questions
Who is eligible to receive gratuity?
An employee is eligible for gratuity if the following criteria are met:
- The employee retires due to superannuation.
- The employee voluntarily retires from employment.
- The employee terminates employment after completing at least five years of continuous service.
- In the event of the employee's death, the gratuity is paid to a nominee. Gratuity may also be paid in case of disability due to an accident or illness.
What is the upper limit on gratuity you can receive?
The maximum amount of gratuity an employee can receive is capped at ₹20 lakh. Any amount exceeding this limit is considered ex-gratia, which is voluntary and not legally mandated. Employees can use a gratuity calculator to determine the amount they may receive, with the limit depending on their years of service.
If an individual is a contract employee, will they receive gratuity after completing 5 years of service?
If an individual is working for five or more years and is on the company's payroll, they are eligible for gratuity. However, if the individual is employed through an independent contractor for services to a company, they are not eligible for gratuity.
How much time does the employer take to release the gratuity amount?
Employees eligible for gratuity must submit an application within one month from the date gratuity is due. Once the application is received, the employer is required to pay the gratuity amount within 30 days of the end of employment.