One of the monetary incentives for staying in an organization long enough is the expectation of gratuity payment. This is a lumpsum amount, a payment for services rendered over a period of time.
Requirements for gratuity payment
There are certain statutory requirements that an organization has to adhere to for the payment of gratuity to its employees.
- Employees are eligible for it if they have completed at least five years in the company.
- Calculations do not round off the number of years to the next number. So, for example, if one has completed 10 years and 10 months in a company, the firm will calculate on 10 years and not 11.
- The maximum amount that an organization can pay to an employee is Rs 10 lakh. Anything above this amount is known as ex-gratia.
- Non-government employees covered under the Payment of Gratuity Act, 1972, are entitled to tax exemptions of up to Rs 10 lakh or 15 days’ salary (7 days for seasonal employees), whichever is lower.
- Government employees are fully exempt from tax on the amount.
When does a company pay gratuity?
An employee is eligible when they retire or leave or pass away after having worked with the same company/employer for five years (this is required for retirees and persons that leave).
The formula for arriving at the gratuity amount
In the calculation, the following elements are important:
N = number of years of work/service
B = basic salary that was last drawn (including DA)
15/26 = since a month equals 26 working days, 15 days’ salary amounts to 15/26.
Therefore, the formula for calculating gratuity is: N*B*15/26
Additional Read: How Does the Group Gratuity Scheme Benefit Your Institution?
Case study: Calculating gratuity
Rishi has been working in an IT company for 20 years. And the last salary he drew was Rs 30,000. Therefore, his gratuity amounts to:
= 20 x 30000 x 15/26
= Rs 346,153.85
Thus, the amount payable to Rishi is Rs 3,46,153.