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What is Gratuity?
Gratuity is the monetary gratification offered by the employer to the employee as a gesture of appreciation for their long term service. Gratuity is a lump sum amount that is paid on resignation, retirement, or in the event of an employee's death or incapacitation. Gratuity in India Gratuity is covered under the Payment of Gratuity Act, 1972, which applies to organizations that have 10 or more employees.
This benefit is an expression of appreciation for the employee's years of service and acts as a retirement income. Gratuity is generally calculated using the basic salary of the employee and the years that the employee has worked for the employer.
How is Gratuity Calculated?
The formula to calculate gratuity is:
Gratuity = (Basic Salary × Years of Service × 15) / 26
Here's what the terms mean:
1. Basic Pay: This includes the last drawn basic pay and dearness allowance, if applicable.
2. Service Years: The number of completed years the employee has served the organization. A period exceeding six months is rounded up to the next full year.
3. 15/26: This is for every year of service days' worth of salary divided by 26 that is the working days of a month
Illustration
If an employee has a basic salary of ₹ 30,000 and his years of service are 10 years 7 months
Years of Service=11 since it is being rounded up.
- Gratuity = (30,000 × 11 × 15) / 26 = ₹1,90,385
Important Points to Recall:
1. Under the Payment of Gratuity Act, the highest gratuity payable is ₹20,00,000.
2. If an employee is not covered under this Act, the gratuity is determined based on the company's gratuity policy.
3. Under the Income Tax Act, gratuity is tax-free up to a limit.
Gratuity is a reward for loyalty and encourages employees to stay longer with an organization. It is an important component of financial planning for retirement.
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