What is the formula for premium calculation of group gratuity policy?

Gratuity is given by the employer to the employee in lieu of the services rendered during the period of employment. Here, we’ll get to learn the criteria and formula for the premium calculation of the Group Gratuity policy. Usually pays the gratuity at the time of retirement but can also pay earlier, provided the below conditions meet –

1. The employee has completed a minimum of five years of service with an organization and
2. Death of an employee or disability due to an accident or disease

Key Takeaways

• The “26” Day Logic: The formula divides your monthly salary by 26 rather than 30. This assumes 4 Sundays are unpaid rest days, effectively making the “15 days’ salary” worth more than a standard half-month’s pay.

• Continuous Service Nuance: For eligibility, “continuous service” includes periods of authorized leave, strikes, or even lockouts. It only breaks if there is an unauthorized absence from work.

• Actuarial Benefit: Companies using a Group Gratuity Policy (like those offered through SecureNow) benefit from professional actuarial valuations. This prevents “liquidity shocks” where a company might otherwise struggle to pay multiple retiring employees at once from current cash flow.

• Tax Efficiency: For employers, contributions to an approved gratuity fund are treated as a business expense, reducing taxable income. For employees, the payout is tax-exempt up to the statutory limit.

• Rounding Illustration: As noted in your article, an employee with 20 years and 7 months of service gets paid for 21 years, significantly boosting the final settlement.

Calculation of the gratuity amount payable depends on two factors:

1. Last drawn salary and

2. No. of years of service

The gratuity amount is equal to 15 days of last drawn salary for each completed year of service. Last drawn salary includes basic salary, dearness allowance, and commission received on sales if any. The formula is as follows –

Gratuity Amount = (15 X last drawn salary X tenure of working) divided by 26

Additional Read: What are the different types of Group Gratuity Insurance plans?

Illustration –

Suppose an employee’s last drawn basic pay is Rs 60,000 per month and he has worked with the company for 20 years and 7 months. In this case, using the formula above, gratuity calculation would be as:
(15 X 60,000 X 21)/26 = Rs. 7.26 lakh

In the above case, we have taken 21 years as the tenure of service because the employee has worked for more than 6 months in a year. Had he worked for 20 years and 5 months, 20 years of service would have been taken into account while calculating the gratuity amount?

Retirement gratuity is calculated as one-fourth of a month’s basic pay plus dearness allowance is drawn before retirement for each completed six monthly periods of service. The retirement gratuity payable is 16 times the basic pay subject to a maximum of Rs 20 lakh.

An employer can pay out the gratuity proceeds from his current revenue but this can cause financial strain at times.  An efficient way of meeting the gratuity liability is through a group gratuity policy which

1. helps to ascertain the liability and
2. set up a gratuity fund and pay contributions as and when required
3. earn good market-linked returns from an investment of the fund

Actuaries help in the assessment of the gratuity liability of a company, i,e to maintain the optimum amount in the gratuity reserve fund. Group Gratuity liability premium depends on the following factors –

1. Average tenure,
2. The average salary,
3. Average age,
4. Total employee strength and
5. No employee deaths in last 3 years

Summary: Gratuity & Group Gratuity Insurance

Government employees are eligible for gratuity

Government employees are eligible to receive gratuity payments after completing five years of continuous service. The calculation formula involves the drawn basic salary and years of employment. Utilize an online gratuity calculator for accurate results and effective financial planning. Employees covered under the Payment of Gratuity Act 1972 can calculate their entitlement.

After a qualifying year of employment, eligible employees receive a gratuity amount per their month salary. Upon retirement, employers pay the gratuity amount received. Employees’ years of service and monthly salary play a crucial role in determining the gratuity.

Frequently Asked Questions (FAQs)

Q1: What happens if an employee resigns at 4 years and 240 days?

A) Generally, the law requires a full 5 years. However, various court rulings and the Social Security Code suggest that if an employee has completed 240 days in their 5th year (in a 6-day workweek), they may be eligible. This is a common area of legal dispute.

Q2: Does the ₹20 Lakh limit apply to every single job I have?

A) No, the ₹20 Lakh limit is a lifetime cumulative limit for tax exemptions. While you can receive more as “ex-gratia” from an employer, any amount exceeding the statutory limit across your entire career becomes taxable.

Q3: Is the 5-year rule applicable to fixed-term contract employees?

A) Under the new Social Security Code (2020), which recently came into force, the eligibility for fixed-term employees has been reduced to 1 year. This is a major shift from the older 1972 Act.

Q4: Can an employer refuse to pay gratuity for misconduct?

A) Yes. Gratuity can be partially or fully forfeited if an employee is terminated for acts involving violence, riotous behavior, or moral turpitude, provided the damage to the employer’s property is quantified.

Q5: Why should my company set up a “Gratuity Trust”?

A) A Trust ensures that the money meant for employees is legally ring-fenced. Even if the company faces bankruptcy, the gratuity funds remain protected and must be paid out to the eligible employees.

About The Author

Rohit

MBA Insurance and Risk

Rohit is an experienced insurance professional with 7 years in the industry, specializing in Group Gratuity. Writing for SecureNow, he creates insightful blogs and articles that help businesses understand the benefits and intricacies of group gratuity plans. His expertise ensures readers receive practical advice on implementing and managing these plans to support employee financial well-being. Committed to making complex insurance topics accessible, Rohit stays current with industry trends, providing valuable content that empowers businesses to make informed decisions about their group gratuity needs.