How Is a Gratuity Calculated Online?

If you work as an employee, you must be thinking about your right to gratuities. You might have heard about it, but you want to be sure you understand what it implies or how much you can expect to earn as a worker. The gratuity rule is covered in this post, along with how it affects you as an employee.

Keep reading this to get a better understanding of this topic. This will enhance your knowledge. It will help you learn a lot. This is an important topic that benefits people all over the world.

Things you need to know about the gratuity rule

Only those employees can claim for a gratuity rule who have completed five or more years of service.

When you retire or quit your job after at least five years of service, you can become a gratuity claimant. Claiming the gratuity is interpreted as the conclusion of your employment with the employer.

A gratuity payment can only be sanctioned for an employee after the completion of a minimum of five years of service. If the amount exceeds INR 50 lakh, it may be subject to taxation as mentioned under Section 32(C) of the Income Tax Act, 1961. The gratuity amount is given as the last drawn salary multiplied by the years of service completed. This is a very simple way to calculate the same.

Employers pay it to employees on retirement or when they leave jobs.

The amount increases only if there are exceptional circumstances, such as a casualty or death of the employee due to an accident. In the case of retirement, the maximum limit that is prescribed under the law is about INR 2,00,000 before one month’s notice. This is applicable for retirements on grounds of age and voluntary retirement.

Tax benefits associated with gratuity

• The income tax that one can save from this goes up to 20%.
• With recent modifications to Section 10, gratuity is tax-free up to Rs. 20 lakh (10).
• It is a one-time cash payment made to the worker upon retirement.
• It is a tax-free amount paid by the company, not the employee.
• Statutory gratuities are the only payments free from income taxes.

According to the Income Tax Act of 1961, which exempts them from income tax, a gratuity is a sum of money provided by an employer to a worker in honour of their achievements. The annual gratuity is calculated based on your age at the time of retirement, or at the time of leaving the job.

Calculation

Your gratuity amount depends on:

• Last drawn salary
• 15/26 of the last drawn salary (for conductors) or 15/30 of the last drawn salary (for non-conductors).
• This can also come down to 50% if there has been a long illness, maternity leave, or other circumstances. If you have worked for the same employer for more than ten years and have not received any other benefits, your gratuity will be reduced.

Like medical reimbursement, you may get monetary relief instead of a pension plan, depending on your position within that organization.

The formula for gratuity calculation:

Last Drawn Salary 15/30 Number of Completed Years

Terms associated:

• Last drawn salary: The average of the last ten months’ salary
• 15/30: The ratio of gratuity to last drawn salary
• Number of completed years (NWC): The number of years you have worked in the company divided by 16

Gratuity Rules 2021

The gratuity rules 2021 came into implementation on 1 April 2021. There have been changes since then. Under the new provisions stated in the gratuity rules 2021, these items are excluded from the salary of the employer:

• Bonus, pension, PF contributions, transportation allowance, HRA, overtime, and gratuity. After the implementation of the new labour law and the gratuity rule, the new compensation structure will have to undergo certain modifications in the future.
• Employees’ in-hand pay is also going to be reduced due to all these new laws coming into effect. There will be significant deductions for social security programs.
• Due to the new law’s restriction, an employee’s allowances cannot exceed 50% of their base pay. According to the new gratuity rule 2021, employers must raise employees’ basic salaries by 50%. By limiting the allowance to 50% of the total salary, the employer will also pay more in staff gratuities. These benefits are given to employees who have been with the business for more than five years. Employees will receive more benefits than before upon retirement as a result.

Retirees should know their gratuity entitlement under the law

• The gratuity law applies to all employees. Regardless of age or service length.
• All the employees who have completed five years of service under the same employer will get an extra month’s gratuity with their salary every year.
• The gratuity amount is the last drawn salary multiplied by the years completed in service (i.e., INR 80,000 x 6 = INR 480,000).

Conclusion

Gratuity entitlement is a critical topic in India. And we must be well informed about the gratuity rules and schemes to make informed decisions about our future. As mentioned above, certain items like bonuses, PF contributions, overtime, etc. are excluded from the salary of the employers. 

The gratuity rule 2021 is also going to negatively influence the in-hand salary of the employees. Moreover, all the employees will also get the benefit of a month’s extra gratuity with their salary every year. If you want to know more about gratuity rules and different investment schemes and loan options, you should visit Piramal Finance.