5 Facts About a Gratuity Calculator! Read to know

gratuity

Gratuity is a complicated term in itself. A newly hired employee might get confused with the rules and regulations implemented by the state and federal government. 

Let’s discuss five such questions that can provide a better understanding :

  • What is gratuity ?
  • What is the eligibility criteria for gratuity ?
  • How to calculate gratuity?
  • How does a gratuity calculator function?
  • What are the rules imposed by tax authorities on gratuity ?

What is gratuity?

Gratuity is the amount that the employer pays to the employee against the services rendered. There is a certain criteria which needs to be met in order to receive gratuity. 

In the year 1972, the then ruling government amended the payment of gratuity act 1972. Under this act, a scheme was introduced to provide monetary benefit to the employees working in various sectors such as railways, factories, ports, mines, etc. 

What is the eligibility criteria for gratuity ?

Each employee is not eligible for gratuity. Employees need to fulfill these requirements in order to claim gratuity. Lets list the eligibility criteria for the employees to claim gratuity:

  • The employee needs to complete five years or more than five of continuous service in an organization in order to qualify for gratuity.
  • The employee should be eligible for superannuation. Superannuation refers to routine payment made to funds as an investment for future pension. 
  • Gratuity is claimed at the end of services. 
  • An employee needs to complete five years of service before resigning with the company to claim 100% of the gratuity amount 
  • In unfortunate circumstances, if the employee succumbs to a fatal disease or meets with an accident the remaining family member will receive the gratuity amount.
  • Gratuity can be split in different FDs.

How to calculate gratuity?

The amount of gratuity is paid by the employer. The formula to calculate gratuity is 

 Number of years the employee has rendered service to the organization X the basic amount of the last withdrawn salary + dearness allowance / 26.

For instance, an employee is working in an abc organization for more than 10 years. The last drawn salary amount is 20000. The gratuity for such scenario can be calculated by 

The gratuity amount= 10 X 20000 X 10 / 26 = 76,923

Although there are two important points that needs to be considered 

Gratuity act has restricted the limit of gratuity claim amount to 20 lakhs. The gratuity amount cannot exceed more than 20 lakh.

If the employee has completed more than 6 months of a year then it is rounded up to be added as a year to the total number of years the employee has rendered service. If the employee resigned completing less than 6 months of a year then that year will not add up to as a whole year. 

How does a gratuity calculator function?

An online gratuity calculator automates the calculation minimizing the risk of error. Online gratuity calculator calculates the gratuity amount just within a few clicks. The employee needs to fill in the required details such as :

  • The basic salary amount of the last withdrawn amount 
  • Number of years the employee has rendered services to the organization 
  • The number of years can be changed allowing the employee to calculate the amount at any point of time . 

What are the rules imposed by tax authorities on gratuity ?

Gratuity is an amount that an employee receives under the payment of gratuity act 1972. The government has amended a few rules that need to be followed to claim gratuity.

A few of the important rules are:

  • The gratuity amount received by any government includes no tax deductions. 
  • The gratuity amount cannot exceed the limit of 20 lakhs irrespective of the fact if the employee is a government employee or a private sector employee.

These are a few rules that the employer has to follow while granting gratuity to any employee. 

About Shailendra Kumar

Shailendra Kumar is an experienced Financial Consultant and Tech Reviewer who has 7+ years of experience in the field of finance, business, and technology. He is very passionate to write about Finance, Business, Technology, Gadgets, Digital Marketing, Fashion, Lifestyle, etc.

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