According to the Gratuity Act 1972, employers who have worked for a company for a minimum period of 5 years are entitled to a lump sum bonus as a token for their work duration. An organisation is considered to be under the Gratuity Act if they have 10 or more employees working on a single day, in a 12 month period.
Employees usually receive gratuity at retirement. Nonetheless, in specific scenarios, the amount can also be paid beforehand. In the event of the employee’s death, the gratuity is often paid to their family. Similarly, an employee with a physical disability due to an accident is also entitled to the same.
Parameters required for gratuity calculation
The formula for gratuity calculation requires a few parameters, which are as follows –
- Last drawn salary- Consists of the basic pay plus commission or incentives as received. Dearness Allowance is also considered in the case of government employees.
- Years of service.
- Number of working days each month- Considered as 26 days for employees covered under the Gratuity Act and 30 days for employees that are not covered under the same act.
Gratuity calculation for employees covered under the act
Formula = Last drawn salary x (15/26) x Number of years of service.
For instance, let’s assume an individual was drawing Rs.75,000 as their last basic pay with an employment tenor of 15 years and 7 months. As per this formula, the amount of gratuity they are entitled to –
Gratuity= Rs.75,000 X (15/26) X 16 = Rs.6,92,308.
The employment tenor is rounded off to the next year since the employee has worked for more than 6 months in the last year. If they had worked for 15 years 3 months, then as per the act it would be rounded off to the current year, which is 15 years.
Gratuity calculation for employees not covered under the act
Formula = Last drawn salary x (15/30) x Number of years of service.
The employer is not in any way restricted by law to pay gratuity to their employees, even if they are not covered under the act.
However, if they decide to pay, some adjustments made to the formula during gratuity calculation include –
- Number of working days in a month being increased from 26 to 30.
- Term of service is considered based on each completed year.
So, according to the previous example,
Gratuity= Rs.75,000 X (15/30) X 15= Rs.5,62,500.
Gratuity Calculation in case of death
If a person passes away during their employment tenor, gratuity is paid to their family in multiples of the basic pay and depends on total years of service. For instance:
- Less than a year- Gratuity is 2 times basic salary.
- Between 1 year and 5 years- 6 times basic salary.
- Between 5 years to 11 years- 12 times basic salary.
- Between 11 years and 20 years- 20 times basic salary
- More than 20 years- Half of the salary multiplied by every 6 months of service, to a maximum 33 such emoluments.
You can invest your gratuity for even additional earnings. Instead of putting it in a savings account within a financial institution, investing the sum in an FD, for instance, generates higher returns. You should invest in FDs for long-term benefits. Nonetheless, check current FD rates offered by multiple financial organisations.
Top financial institutions offer high interest rates and stable investment options. Additionally, such instruments are safe, leading to considerable returns without putting your gratuity sums at risk.
Also, investing your gratuity funds is the better option considering the amount and that it is over and above the individual’s monthly income.
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