Gratuity is a widely acknowledged retirement benefit for such employees who have been working for a continuous service of at least five years in the same employment. The payment of gratuity, as per the Gratuity Payment Act, 1972, is made in respect of long and faithful service. Another good thing about gratuity is that it provides financial security during retirement or in case of a career switch.
How Is Gratuity Calculated?
Gratuity is paid concerning the last drawn remuneration and work years. The formula of gratuity calculation is as follows:
- Gratuity = (Basic Salary + Dearness Allowance) × 15/26 × Years of Service
Where, 15 days’ pay stands for one full year of service. The denominator stands for 26 working days in a month, assuming an average of four holidays.
Calculating An Example
Let’s suppose that the Basic Salary plus DA is Rs.50,000, and the period of employability is for 10 years. Then the equation should be:
- Step 1: 50,000 × (15/26) = approx Rs.28,846.15(for a year’s benefit)
- Step 2: Multiply by years of service → 28,846.15 × 10 = ₹2,88,461.50 gratuity.
- Very well! So if we consider a last drawn salary of ₹55,000 and 10 years of service, the gratuity amount would be ₹3.17 lakh approximately.
Maximum Limit Of ₹20 Lakh
According to the law, there is capped a maximum limit on gratuity. Whatever number of service years a person has undergone or however high the salary is, gratuity payments must not exceed ₹20,00,000 as per the Gratuity Payment Act.
Who Is Eligible For Gratuity
- The employee must have completed 5 years or more of continuous service. Even contract workers may become eligible, depending on the nature of service and employer’s policy.
- The payment is generally due when the employee retires; resigns or is terminated (subject to conditions). There are also provisions relating to some cases of incapacity.
Importance And Uses Of Gratuity
Financial safety net after retirement or during transition. Helping an employee plan for finances. Acts as an official acknowledgment of loyalty and devotion by the employer. Most people know that the amount is used for retirement planning, paying off debts, or making investments.
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