What is gratuity and how can you calculate it?

According to a bill passed by the Parliament of India in 2018, the government now has permission to raise the cap of tax-exempted gratuity if and when required. Following this executive order, the gratuity ceiling for all government employees went up considerably to Rs. 20 Lakh. Additionally, this upper ceiling (Rs. 10 Lakh) for the private employees has been removed too. It gives employers the flexibility to change the cap on their tax-free gratuity without having to alter the primary legislation on the same.

While such modifications at the executive level add on to the list of benefits for employees, one must have an in-depth idea about how to calculate gratuity amount and what it precisely is. Subsequently, individuals can plan their finances better in the future and strategies their impending expenses accordingly.

What is gratuity?

Gratuity can be defined as a benefit offered by the employer to an employee in return for rendering services for 5 years or more continuously. This monetary benefit is payable to an employee on his/her –

  • Superannuation
  • Resignation or retirement

Although the Payment of Gratuity Act, 1972 specifies the clause of paying of gratuity to an employee only if he has rendered his services for at least 5 years at a stretch, there are specific conditional exemption –

  • Termination of services due to death.
  • Termination of services due to disability from a disease or an accident.

Following this, an employer is liable to pay his employee with the gratuity irrespective of the number of years rendered in service.

To avail the gratuity amount post-retirement, all that one needs to do is apply for the same within 30 days from when the amount becomes payable. Furthermore, if the date of the retirement or superannuation is known in advance, one can apply for the same 30 days before the date.

This amount so withdrawn can be used to finance one’s post-retirement expenses. It thus lends in financial stability despite the absence of a regular source of income.

One can also utilise this fund to gain an attractive return on investment coupled with lower risks and higher security of his/her corpus. Such savings schemes include investing in Fixed Deposit with reputed financial institutions like Bajaj Finserv.

Retired individuals can go for the non-cumulative fixed deposits that help them earn regular interest payouts. Such benefits of periodic payments post-retirement help them meet their daily expenses.

Companies offers payout frequency in forms of –

  • Monthly
  • Quarterly
  • Half-yearly, and
  • Yearly

Fixed deposits from reputed financial institutions come with multiple lucrative features that include –

  1. Assured return on investment
  2. Online loan against fixed deposit amount in cases of emergencies
  3. Fixed deposit calculator
  4. Additional 0.35% interest rate for senior citizens
  5. Minimum deposit of Rs. 25,000
  6. Higher credibility via stability ratings from ICRA’s MAAA and CRISIL’s FAAA

Thus, with the removal of the upper limit of gratuity amount, individuals can go for an investment of this amount and earn assured and attractive returns on their corpus. It offers customers with increased flexibility to take control of their finances and hence have access to a hassle-free investment experience.

However, considering that multiple financial lenders now offer their savings schemes, potential investors need to compare plans and settle upon one that fetches them the best returns. It requires one to have an in-depth idea about the amount of gratuity they will avail and how to calculate the same.

How to calculate gratuity amount?

The amount of gratuity of an employee depends upon the tenor of the services and the last drawn salary. The calculation of this requires one to follow this formula –

  • For those falling under the Gratuity Act

Gratuity = N x B x 15/26

Where, N is the number of years of service in an organisation and B is the last drawn salary of an individual plus his/her DA.

  • For those not covered under the Gratuity Act

Gratuity Amount = (Last drawn salary amount x 15 x period of service) / 30

One can also opt for gratuity calculators that accurately compute the total amount as well as the taxable obligation for the applicable fiscal. Subsequently, with an idea on how to calculate gratuity amount, individuals can now plan on their investment amount of gratuity to be received in advance. Such management of your post-retirement finances lends in financial stability and helps sponsor expenses despite having no stable source of income.

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