Gratuity Calculation: Five Points Every Salaried Employee Should Know

Gratuity is a significant lump sum amount for all employees. Many low to middle-income groups look forward to receiving a lump sum on retirement, which can be used as capital to build a kitty for their retirement. With using various formulae differing on your employer type, you can understand an approximate amount of gratuity you have earned till date. Your last salary drawn plays a vital role in calculating gratuity. You can easily use various online gratuity calculators to make an approximation of the gratuity that you will be paid.

There are two different formulae and tax-free conditions that you need to keep in mind when you think of receiving the gratuity amount. Let us look at five points you need to keep in mind regarding your gratuity:

Basic Calculation

Final Gratuity = (0.25)*(Basic Salary + Dearness Allowance) * No. of 6 monthly periods completed. In simple terms, 16 times the basic pay is calculated as gratuity.

However, ensure to get the below information

  • Amount of Basic salary
  • Amount of Dearness allowance
  • Total number of years of service with an employer

Applicable Formula

One of these formulae will be relevant to you:

Option 1 – Applicable to companies falling under the Payment of Gratuity Act, 1972

Gratuity = Last Salary drawn before leaving/retirement x (15/26) x No. of years of service at the organization

Option 2– Applicable if your organization is not covered under the Act, yet pays you gratuity

Gratuity = Last Salary drawn before leaving/retirement x (15/30) x No. of years of service at the organization

  1. Other Components – Variable components are those like dearness allowance or incentives along with any other perks. Any others which were a part of your monthly salary will not be considered for this calculation.
  2. Tax Saving on Gratuity – Only that portion of the gratuity is tax-free which is lowest from among the following three calculations for an employee –
  • If you have a pre-negotiated gratuity amount in your salary package, then it needs to be compared to the gratuity you would receive as per the formula.
  • If your gratuity calculation amount exceeds Rs 20 lakhs, then you will receive only Rs. 20 lakh as tax-free gratuity as this is maximum ceiling mandated by the Indian government.
  • If the amount of gratuity calculated as per the formula is the least then only this portion of your total gratuity amount will be tax-free. The rest of the amount will be clubbed under your taxable income.

Earning good returns from Gratuity money

If you are thinking ofwhereto invest further, look for a high paying and safe investment option for multiplying your gratuity amount. Most people prefer to deposit the gratuity amount in a bank FD without considering the interest rate scenario. Considering it is now on the lower side, the interest rates in India are falling as well. Thus, you should consider companyFDs as a reliable source of earning higher interest. You can easily earn 1-2% more interest than regular bank FDs.

The table below lists the interest rates offered on Bajaj Finance FD, which is one of the leading company FDs in India.

The lowest interest rate available with a Bajaj Finance FD is 7.72% to 8% with a cumulative and non-cumulative option for a tenor of 12 to 36 months. This rate will increase with higher tenors and for 3 years, a rate of 8.6% with the cumulative option is easily possible. Also, a special rate of 8.05% is available for 15 months tenor. Bajaj Finance FDs offers one of the best rates along with the safety on your deposit.

With the FD interest rate scenario in the market going down Bajaj Finance FD provides great benefits. Some of these include online account management, premature withdrawal, loan against FD, multi-deposit facility, and many more.

Rate author