Gratuity is given to the employees who have served the company for the number of years described in the Gratuity Act, i.e., a minimum of 5 years. The gratuity amount payable is determined based on the basic salary and DA of the employee. In case of the employee’s death, the amount payable to the employee is based on the number of service years in the company, the 5-year rule doesn’t apply in such cases. In simple terms, gratuity is a monetary appreciation for the services of the employee over the years in the organization.
Any employee must fulfill one of the following criteria to be eligible for receiving the gratuity:
Even though there are many formulas to calculate gratuity easily, it gets complicated to calculate it when it has to be calculated according to the payment of gratuity act 1972. As per this act, the payment of gratuity is categorized into 2 ways:
Employees' gratuity calculation is different for both of these categories, and it is explained below with the help of gratuity calculation examples:
In order to calculate gratuity of employees who are covered under the act, you need to have their number of continuous employment years and the amount of their last drawn salary. Once you have these details, you can use the following formula:
Gratuity = Number of years in service * Last drawn salary * (15/26)
There are a few companies that are not covered under the payments of gratuity act. But still, the employees of these companies are eligible to receive gratuity under gratuity conditions. In these cases, the gratuity calculation formula is slightly different, the number of working days will be 30 instead of 26. So the gratuity formula for such cases will be:
Gratuity = Number of years in service * Last drawn salary * (15/30)
In case an employee dies due to an accident or illness, their nominee will be eligible to receive gratuity from their organization, In such unforeseen circumstances the below-listed rates of gratuity will be paid by the organization:
|Amount of Gratuity
|Less than 1 year
|2 times the employee's basic salary
|More than 1 year but less than 5 years
|6 times the employee’s basic salary
|More than 5 years but less than 11 years
|12 times the employee’s basic salary
|More than 11 years but less than 20 years
|20 times the employee’s basic salary
|More than 20 years
|Half of employee’s basic salary * Half of employee’s employment tenure
The amount of tax on gratuity completely depends on whether the employee is working in the private sector or the government sector.
Payment of Gratuity Act 1972 covers employees working in mines, factories, plantations, oilfields, ports, railway corporations, or other establishments related to them. It also includes all government jobs.
Generally, the gratuity amount is released along with or just after the employee's full and final settlement is done. The government has made it compulsory for employers to pay the gratuity amount within 30 days.
According to the gratuity act, the employee should submit Form F for nomination within 30 days of completing one year of employment tenure. The employee can only nominate their family member, if they don’t have any family, they can only nominate someone else.
According to the act, a company can not pay any employee more than Rs.10 lakhs as gratuity, regardless of the number of years that the respective employee has completed in the company.
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