Employers hand out gratuity to employees as a token of appreciation for their long-term service. Gratuity is given as a financial benefit to those workers who serve an organisation for at least five years. The amount is provided as a lump sum to employees at the time of retirement or when they resign after serving specified number of years. When received at retirement, gratuity amount helps employees by giving them a financial cushion that can come handy in particularly for managing expenses and maintaining a comfortable standard of living.
Who are entitled to receive gratuity?
As per the Gratuity Act, workers employed in factories, mines, oilfields, plantations, ports, and railway companies, as well as those worked in shops or establishments with ten or more employees at any time in the past twelve months are entitled to receive gratuity. It also covers other types of establishments with ten or more employees as specified by the central government. Once an establishment falls under the Gratuity Act, it remains governed by its provisions even if the number of employees later drops below ten.
When should gratuity be paid to an employee?
Gratuity is payable to an employee upon the termination of employment if he or she has completed at least five years of continuous service. This includes cases of superannuation, retirement or resignation. Additionally, gratuity is also provided in the event of death or disablement due to an accident or disease. However, the requirement of five years of continuous service is waived if the termination is due to death or disablement.
How to calculate gratuity?
Gratuity primarily depends on your last drawn salary and the total number of years of service with the company. By using a gratuity calculator, you can estimate the amount you might receive based on your current salary and tenure. For instance, if you have a basic salary of Rs 15,000, you can calculate your gratuity amount for five years of service or at retirement using a gratuity calculation formula.
The Gratuity Act provides for payment of gratuity at the rate of 15 days wage for each completed year of service subject to a maximum of Rs 10 lakh. However, the gratuity limit for government employees has been enhanced to Rs 25 lakh from the earlier Rs 20 lakh.
Gratuity Formula: (15 * your last drawn basic salary * tenure of working) / 26.
Let’s take this example – You join an organisation at an age of 23 and your basic salary is Rs 15,000 and you serve this company for 35 years till you superannuate at the age of 58. What will be your gratuity at the time of retirement?
Gratuity calculation:
Last drawn basic salary: Rs 15,000
Tenure of service: 35 years
Multiply last drawn salary by tenure of service:
15,000 × 35 = 5,25,000
Multiply the result by 15 and divide by 26: 5,25,000 × 15 = 78,75,000/26
78,75,000/26 = 3,03,846.15
Your gratuity at the time of retirement would be Rs 3,03,846.15.
In conclusion, calculating gratuity is very simple with the above formula and factors involved. By using your last drawn basic salary and years of service, you can estimate the gratuity amount you will receive at retirement.
Disclaimer: The gratuity amount calculated is based on your last drawn salary and the total number of years of service. This amount is subject to change based on adjustments to salary, service tenure and any modifications in relevant laws.
