Know the Gratuity Formula, Calculation Rules and Eligibility in Detail
As mandated by the Payment of Gratuity Act, 1972, gratuity benefits are offered to employees as an acknowledgement for their services. Employers provide this financial assistance usually on retirement or resignation of their employees. The Act, however, categorises individuals to evaluate the amount, basing on different gratuity formula and calculation.
1st Category: Employees under the Act
Employees who work in an organisation with at least 10 employees fall under this 1st category. Companies which come under the Gratuity Act’s purview once always remain covered even if their number of employees drops.
Here, two factors are considered to calculate the gratuity amount –
- Number of service years.
- The last drawn salary.
2nd Category: Employees not under the Act
Employees can also receive gratuity if their respective companies are not covered under the Gratuity Act of India. In this case, however, the number of working days becomes 30 instead of 26 in a month.
Formulae to calculate gratuity amount
- Gratuity formula for employees under the Act
Gratuity = Last drawn salary x years of services completed x 15/26
Last drawn salary of an individual signifies the summation of basic monthly pay, commissions on sales (if any) and dearness allowance. The years of services are considered in the rounded form of the closest full year. Lastly, 15/26 denotes 15 days of the 26 working days per month.
For example, 7 years and 5 months will be 7 years. Again, 7 years and 10 months are considered 8 years.
- Formula for employees not under the Act
Gratuity = Last drawn salary x years of services completed x 15/30
Unlike the 1st category, companies consider the total years of service based on every completed year. For example – if someone worked for 6 years and 10 months, the tenor considered will be 6 years instead of 7.
Know the rules and conditions to follow
An employee can receive his/her gratuity payment before retirement only when he/she has provided continuous services to a company for 5 years. This rule is relaxed in cases of the employee’s death or disability due to any disease or accident. In this case, the gratuity formula is different for both.
- Gratuity calculation on employees’ death
In this case, the gratuity amount depends on one’s service tenor. Its calculation follows the below criteria –
- 2 x basic pay – service tenor is less than 1 year.
- 6 x basic pay – length of service within 1 year to 5 years.
- 12 x basic pay – service tenor is within 5 to 11 years.
- 20 x basic pay – years of service are between 11 and 20 years.
- Gratuity calculation on retirement
If individuals prefer to receive their gratuity fund post-retirement, the amount depends on 1/4th of their basic monthly pay and dearness allowance for every 6 months. The gratuity formula is usually 16 x basic pay, within the maximum limit of Rs.20 lakh.
Besides these, there are some additional gratuity rules which every employee must know –
- An eligible employee must apply for gratuity within 30 days from when the funds become payable.
- In case the 30 days’ period expires, employers cannot reject an application if the reason for the delay is valid.
- As per rules, employers cannot regard any gratuity claim as invalid simply for not applying within the specified period.
Working individuals who have retired are qualified for superannuation, completed 5 consecutive years or faced physical disabilities are eligible for gratuity. Note that this retirement corpus can be an excellent financial source to address your regular needs sufficiently.
Individuals should ensure they have a regular income after retirement by correctly investing their gratuity.
Once you receive the same, plan to invest in schemes like fixed deposits for safe returns. As FDs are market-independent, you can yield guaranteed returns on maturity. A prominent financial company, Bajaj Finance offers Fixed Deposits with the highest stability ratings.
Eligible customers can also enjoy one of the highest fixed deposit rates of up to 8.10%, along with additional features. Senior citizens are eligible to avail 0.25% extra over and above the existing interest rate.
Investing your gratuity funds in Bajaj Finance Fixed Deposit is a good idea, considering the several benefits that it offers.
No matter the applicable gratuity formula, you can easily invest in an FD as minimum deposit starts from Rs.25,000. An online gratuity calculator can better help you estimate the maturity amount and FD returns. So, maximise your benefits with a thorough understanding of gratuity rules and calculation.