Gratuity is a financial benefit employers give to employees about to retire and exit the organization. It is a sum of money that also doubles as a retirement benefit. It commemorates employees on their dedication to the employer and showcases gratitude. It is available to employees who have completed at least five years of work at an organization. Moreover, the employee has to work consistently under the same employer and not have any alternate employer apart from their primary organization. The rules of gratuity eligibility and their calculation depend on the Payment of Gratuity Act of 1972. They are similar for central, state, and private employees, with only minor differences. If you are a central government employee, this article can help you calculate gratuity.
There are two categories of employees for the purpose of calculation of gratuity for central govt employees. These include employees covered and not covered under the Payment of Gratuity Act, of 1972. The types of employees covered under the Act include those working in central govt, such as:
Start Investing with Free Expert Advice!
The types of employees not covered under the Act include:
Depending on the category, there is only a slight difference in the formulas for the calculation.
Gratuity (G) = n x b x 15/ 26
Here, n = the number of years the employee worked in the organization
b = previous month's salary + dearness allowance (an additional sum to offset inflation)
15 = calculation of wages at the rate of 15 days
26 = number of working days in a month
Gratuity (G) = n x b x 15/ 30
The only difference is that the number of working days under this formula is 30.
Here is an example to understand how the formula works:
If an employee earns Rs. 1 lakh every month and has worked at a company for seven years, here is how their gratuity calculation would look like –
G = 1,00,000 x 7 x 15/ 26 = 4,03,000
Also, to simplify the calculation, if an employee completes only 6 months of a year under their employer, the period would be rounded off to 1 year. If they complete anything less than 6 months, then the benefit of rounding off would not apply.
You can use the gratuity formula manually or a gratuity calculator to calculate the amount of gratuity receivable. Using the gratuity calculator eliminates the margin for manual errors and can get you a more accurate response. Moreover, it is free to use and gives instant results. The calculator would use the formula depending on the category you pick. All you have to do is enter two major details:
There are a few additional rules around the payment of gratuity. These include:
The calculation of gratuity for central govt employees becomes simpler once you know how the formula works. To make things easier, you can also use a gratuity calculator. You can also take the advice of a certified financial professional to aid you through the process. The financial advisors at Motilal Oswal are gladly here to assist you.
Related Articles: How to Calculate Home Loan EMI | Making Informed Decisions using a Mutual Fund Return Calculator | How to Calculate Brokerage Fees Online | How to Calculate Car Loan EMI | A Beginners Guide to Calculate Future Value of Money | What are The Uses of Lumpsum Calculator | Mastering Gratuity Calculation: The Step-by-Step Formula