The Indian government passed a bill in 1972 known as “Payment of Gratuity Act 1972”. The Act was passed in the beneficial favour of the employees who are retiring or have retired and the employees loyal to the company. Gratuity is usually paid to the employee at the time of retirement or it can be paid before retirement under certain conditions. Gratuity is the sum that is paid by the employee of the company who has rendered more than five years of his service to the company.
The employee is eligible to receive gratuity only if he has completed at least five years of service. In an unfortunate case of death of the employee or disablement due to an accident or disease, it can be paid before the time of retirement.
Formula for the calculation of gratuity
In the payment of gratuity bill 1972, the government has not specified any percentage as the amount that needs to be paid to the employee. So gratuity that is paid to the employee is calculated using a formula based approach. The gratuity that is to be paid to an employee depends on his last drawn salary and no of years of service at the company. it is important to note here that the gratuity paid to the employee cannot exceed than 20 Lakhs. Previously the maximum amount that can be paid as gratuity was 10 Lakhs which was then revised in March 2022 and made to 20 Lakhs.
Under the Gratuity Act of 1972, the set of employees are divided into two major categories namely:
- Employees that are covered under the act
- Employees that are not covered under the act
Calculation of gratuity for the employees that are covered under the act:
The formula for the calculation of gratuity in essence is:
Gratuity = 1/26 [15 * last drawn salary * no of years of service]
ThisGratuity Calculation formula is based upon the calculation of 26 working days in a month and 15 days a month of service by the employee.
Let’s understand this better by taking an example;
Suppose a person’s recent drawn basic salary is 7,20,000 per annum, and he has worked with his company for around 20 years and seven months. Using the above formula; his gratuity at the time can be calculated as
Gratuity = (15 * 60000* 21)/ 26
This will give us an amount of Rs. 7.26 Lakhs
In this example, we have taken 21 years of service as the person has worked with the company for more than six months in that given years.
If he had worked with the same company for 20 years and five months than at the time of gratuity calculation his experience would be calculated as 20 years.
Calculation of gratuity for retired or employees that are retiring:
In one of the government’s pensioner’s portals, it was stated that gratuity for retirement can be calculated taking salary = basic salary + dearness allowance, where the basic pay is taken for one-fourth of the month that was 15/26 for the employees that were covered under the act.
In an unfortunate event of death or disablement of the employee, gratuity can be calculated based on the period they have served for. Where the maximum benefit will be restricted up to 20 Lakhs
Half of their salary for every completed six months to a maximum of 33 times salary
Calculation of gratuity for the employees that are not covered under the act
There are no restrictions on a company or organisation for gratuity payment to their employees, even when the said organisation is not covered under the act.
The amount of gratuity payable to the employee will be calculated on the basis of half a month’s salary and total working days in a month will be taken as 30 this makes the formula for gratuity:
Gratuity = 15/30 [last drawn salary* no of years service with the company]
Gratuity = ½ [last drawn salary* no of years serviced]
Just like FD calculators, there are various Gratuity Calculator available on the internet or mobile application. FD interest rates calculators are used to calculate the maturity amount while gratuity calculators can be used to know the amount one can receive as gratuity from their employer. Using this amount, you can also invest profitably inFixed Deposits by Bajaj Finance, wherein you can get higher interest rates and flexible tenors.