Let’s Talk About The 3 Ways To Calculate Gratuity Amount

Let’s Talk About The 3 Ways To Calculate Gratuity Amount

Employee benefits have always been a priority for the employers to maintain employee engagement, satisfaction and retention. Gratuity payment is one such benefit under The Gratuity Act, 1972 that makes the workforce of a company feel motivated and valued. It is a performance and commitment acknowledgment reward that is entirely given away by the employer when an employee completes 5 years of service with the same organization. So, this amount is presented in honor of the eligible employees for their extraordinary and incessant contributions. Now, a lot of working professionals do not completely understand the mathematics behind the scheme, i.e., the gratuity formula used to calculate the amount. Hence, in this article, we will talk about the 3 main ways to evaluate the same.

But first, let us have a look at a few facts about the Gratuity Act:

1. The maximum amount that can be awarded to an employee as per the latest amendment in the act is INR 20,00,000
2. The employer holds the authority to reject the gratuity amount payment on the basis of any misconduct or law infringement
3. In case the concerned employee suffers from a prolonged ailment, a deadly disease or death, then the due amount is transferred to the nominee or heir of the employee

Now that we know the essence of the Gratuity scheme, we can move on to the calculation methods:

Using The Online Gratuity Calculator

This is the easiest way to calculate how much gratuity amount will be paid to you once you get retired. You have to simply enter a few required details (mostly digits) as mentioned on screen. The online automatic calculator will ask you to provide your monthly income (basic + dearness allowance), the total time period you worked with an organization (in months and years) and boom, the amount will be reflected in front of you. Basically, there are two categories: For the ones covered under The Gratuity Act and for the ones who are not. The online calculator automatically works differently in both the cases, running the applicable calculations respectively.

Using The Traditional Gratuity Formula

Another way is the pen and paper method to make out how much money the company owes you as gratuity. This is called the traditional gratuity formula.

a. For the registered employees, the calculation is done as follows:
b. G = (15 / 26) X (Last Drawn Salary) X (Number of Years of Service)
c. For the registered employees, the calculation is done as follows:
d. G = (15 /30) X (Last Drawn Salary) X (Number of Years of Service)

The Comprehensive Analytical Calculation

Now, last comes the detailed methodology of calculating the gratuity amount. This one is considered a little comprehensive as it has tax applicability involved. As per Section 10(10) of The Income Tax Act, the maximum limit up to which gratuity is exempt from taxes is INR 20,00,000. Any amount given as gratuity above that is taxable as per salary of the individual. So, go ahead and do your own math! All The Best.


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