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Gratuity Pay In Salary: Meaning, Formula, Eligibility, and Calculation

Gratuity is a very important part of employee advantages. A lot of companies all over the world provide it. It seems to be a significant form of economic security for workers, especially upon retirement or resignation. That is why employers as well as enrollees need to understand gratuity, along with its meaning, procedure, eligibility criteria, and calculation techniques.

Gratuity Meaning

Gratuity, in the context of employment, means a huge amount of compensation given by an employer to a worker for appreciating the services the employer has given throughout the employment period. It is generally given upon retirement, resignation, or fulfillment of a specific term of service, as determined by the gratuity guideline of the employer or relevant labor regulations.

The Formula for Gratuity Calculation:

The estimation of gratuity is generally based on a predetermined procedure that takes into account the employee’s tenure of service and last drawn salary. Although the particular formula may differ across jurisdictions and companies, here is a familiar technique for estimating gratuity:

Gratuity = (Last Drawn Salary × Number of Completed Years of Service × Gratuity Factor) / 26

In this formula:

  • Last Drawn Salary implies the basic salary along with any dearness allowance or other fixed allowances of the employee.
  • Number of Completed Years of Service indicates the total number of years and any extra months of service finalized by the worker.
  • The Gratuity Factor is decided by the employer and is generally a fixed percentage (typically between 15-30%) depicting the ratio of the last drawn salary distributed as gratuity.
  • The divisor 26 depicts the number of working days in a month.

It is very crucial to point out that there may be deviations in the formula and elements used for gratuity estimation based on regional regulations or company guidelines.

The employees whose employer is not covered under the Gratuity Act have to follow a different formula for calculating their gratuity. They have to calculate the gratuity amount as per the half-month salary on every completed year of service. The formula they have to apply is  (15 * Your last drawn salary * the working tenure) / 30.

For instance, if you have a basic salary of Rs 30,000 and you have given continuous service for 7 years and the employer is not covered under the Gratuity Act the gratuity amount will be the following:
Gratuity Amount = (15 * 30,000 * 7) / 30 = Rs 1,05,000.

Gratuity Eligibility:

Gratuity eligibility standards generally comprise the fulfilment of a certain period of constant service with the employer. This tenure may differ from jurisdiction to jurisdiction and may also be released on the particular policies of the employer.

There are many countries where employees become qualified for gratuity after finishing a minimum of five years of constant service with the exact employer. Nonetheless, this condition can vary, with some jurisdictions specifying a shorter or longer qualifying time.

Also, gratuity eligibility may be dependent upon the reason for the cessation of the job. For example, workers who quit or retire may be qualified for gratuity, whereas those removed for transgression or other excuses determined by the employer may not qualify. You may become qualified to obtain gratuity under the below-mentioned conditions: 

  • A worker should be qualified for superannuation.
  • Employees should retire from the company.
  • An employee resigns after working for 5 years with a single employer.
  • When an employee passes away or suffers disability because of disease or accident.

Good to Read:- Simple Notice Period Calculation Method 

Calculating Gratuity:

To describe how to calculate the gratuity, let’s give you an example:

  • Suppose the Last Drawn Salary of an employee is $5,000.
  • Number of Completed Years of Service: 10 years and 6 months
  • Gratuity Factor: 20%

By using the formula mentioned before you can easily calculate the gratuity. The gratuity amount will be like the following:

Gratuity = ($5,000 × 10.5 × 20%) / 26

= ($105,000 × 20%) / 26

= $80,769.23

In this instance, the estimated gratuity amount is $80,769.23.

It is very important to point out that there may be caps or boundaries set on the maximum amount of gratuity payable, either by law or employer guidelines. These boundaries could be based on various facets like the worker’s salary level, term of service, or a mixture of both.

Tax Implications:

Gratuity payments may have tax implications for both employers and employees, differing by jurisdiction. In numerous countries, gratuity obtained by a worker is taxable under income tax laws. Nonetheless, specific exemptions or deductions may involve depending on various factors like the span of service, the quantity of gratuity obtained, and applicable tax laws.

Employers are generally accountable for subtracting taxes from gratuity payments at the time of allotment and sending them to the relevant tax administrations.

Calculation of Gratuity in Case of Death of an Employee

Employees are qualified to obtain gratuity in case of death or disability due to any disease or accident. In such unpredictable events, the gratuity of the worker is estimated based on the employment term of the worker. Nonetheless, it must be noted that the maximum amount of gratuity that this type of employee can obtain is Rs. 20 lakh. Here is a brief idea about the gratuity of this type of employee: 

Employment TenureThe amount payable towards gratuity
Less than 1 year 2 times the employee’s basic salary
More than 1 year but less than 5 years 6 times the employee’s basic salary
More than 5 years but less than 11 years12  times the employee’s basic salary
More than 11 years but less than 20 years 20 times the employee’s basic salary
20 years or moreHalf of the basic salary for each completed six-monthly period. Nevertheless, it is subject to a maximum of 33 times the basic salary.

Conclusion:

Gratuity structures a crucial portion of worker benefits, delivering economic safety and tribute for devoted service induced by workers. Having an insight into the meaning, calculation, eligibility criteria, and tax significance of gratuity is important for both employers and employees to guarantee compliance with applicable ordinances and approaches. By completely comprehending gratuity in salary, employers can efficiently organize their responsibilities, while workers can make informed decisions related to their economic well-being during and after their term of service.

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