An employer pays a gratuity to an employee recognizing their services rendered to the organization. It is a component of the salary received by the employee and aims to give retirement and social security benefits when employees leave the job.
The Payment of Gratuity Act 1972 governs gratuity and its payment methods. It is offered to government employees and private sector employees. However, the employee must have completed five or more years of service with the organization. The employee is eligible for a gratuity before the completion of five years in case of incapacity or death.
Open Your free Demat Account in just 5 minutes!
Many workers want to learn how to calculate gratuity for private employees as it helps to plan future expenses and long-term financial goals.
The calculation of gratuity is based on the following formula:
G = AB15/26
G is the gratuity amount
A refers to the period (in years) for which you have serviced the employer
B is the last drawn salary, including dearness allowance
26 is the number of days in a month, and 15 is the salary amount for 15 days
You can calculate gratuity manually using the above formula or rely on a gratuity calculator for instant and accurate results.
Imagine you have been working with a company for the past 6 years. The salary you earn each month is Rs. 15,000, with a dearness allowance of Rs. 3,000. To calculate gratuity, your last drawn salary becomes
15000 + 3000 = Rs. 18,000
A or the number of years you have rendered services to the organization is 6.
G = 6*18000*15/26
Hence, the gratuity amount totals Rs. 62,308.
Now that you know how to calculate gratuity for private employees, you must also know how to calculate the financial component if your organization is not a part of the Act. While these organisations can pay gratuity, its calculation considers your salary for half a month for every year you have serviced the organization. The salary is a total of commissions, dearness allowance, and basic salary.
The formula for the calculation is as follows:
G = 15AB/30
G is the gratuity amount
A is the duration of service
B is the last drawn salary
30 is the number of days in a month
Suppose you have been working with a company for 10 years and draw a salary of Rs. 60,000. The gratuity amount calculation will be done as follows:
G = (15*60000*10)/30
Your gratuity amount will be Rs. 3,00,000.
You can use the gratuity calculator to avoid making errors in calculations. To do this, you need to enter the monthly salary and the years of service. The monthly salary is a total of basic pay and dearness allowance.
The benefits of using the calculator include:
You must fulfill the following conditions to receive gratuity:
The taxes applied to gratuity depend on the type of employee. Government employees don’t need to pay any taxes on the gratuity. For private-sector employees, if the employer is a part of the Gratuity Act, you are exempted from income tax for the least of the following three amounts:
Gratuity calculation for private employees helps predict the amount you will get on leaving the job. As a result, you can make long-term financial decisions for wealth creation and recurring investment income. You can use the money you receive from your employer for your retirement or to pay for medical expenses. You are eligible for a gratuity only if you complete five or more years of service with your employer.
Related Articles: 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 | How to Calculate Gratuity for Government Employee