Gratuity calculator uses a predetermined set of formulae to calculate the gratuity. It includes last drawn salary, number of working years & dearness allowance. Read here to learn more.
The gratuity amount is only offered to employees who have rendered service to the company for five years or more, and the Payment of Gratuity Act, 1972 governs the same. A gratuity calculator is a tool used to estimate the sum of gratuity a person will receive after working for a firm for atleast five years. It’s a useful tool for employees planning to leave their current position. In this article you’ll learn about 15/26 in Gratuity Calculation.
The calculators use a formula to determine the gratuity amount based on input variables like last drawn basic salary, years, including tenure of employment with the company, dearness allowance, and so on.
The last drawn basic salary and the tenure of continuous service with the company must be entered. Your basic wage, dearness allowance, and sales commission are included in your most recently drawn basic salary. Within seconds, the calculator would display the gratuity amount. It’s easy to use and can be used multiple times. The Payment of Gratuity Act, 1972 state the rules for gratuity calculation. There are two types of employees under these rules—those covered under the Act and those not covered under the act. The Act also establishes requirements for organisations that fall under its jurisdiction.
How Did the Gratuity Calculation Formula Work?
Based on the gratuity calculation method, the calculator will help you calculate the expected gratuity amount. To calculate the gratuity, you’ll need to know your last drawn basic salary as well as the tenure of service as an employee of the company.
Your last drawn salary will include your basic salary, dearness allowances, and any sales commissions you may have received in the particular tenure.
According to the rules, there are two primary groups for determining the calculation: one for employees covered by the Act and the other for employees not covered by the Act.
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For Employees Who Are Covered under the Act :
Gratuity= b*15/n*26
Wherein b stands for the last drawn salary of the employee along with the dearness allowance and n stands for the number of years of service of an employee with the company
The Payment of Gratuity Act also states that the gratuity amount cannot exceed 20 lakhs, and Ex-gratia will be applied to the excess gratuity amount.
If you have completed more than 6 months of service since your previous date of joining, it is considered a completed year for computing gratuity. So, if you’ve worked for 15 years and seven months, you’ll get the gratuity amount for 16 years. However, if you worked for 15 years and 5 months, your gratuity will only be calculated for 15 years.
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For Employees Who Are Not Covered under the Act :
The employees would get the gratuity amount even if the company was not covered under the Act. However, the number of days will be increased from 26 to 30
The formula for calculating gratuity is:
Gratuity = {15xlast drawn basic salary x no of years working /30}
What Is 15/26 in Gratuity Calculation?
Following is the formula to calculate the gratuity of an employee is
{basic salary dearness allowance /26} x 15 x tenure of service.
Here, 26 states the projected number of working days in a month, and 15 represents the half-month compensation of 15 days. The per-day wage is calculated by multiplying the basic income DA by 26. When we double the daily wage by 15, we receive a half-month salary.
Finally, we may calculate the actual gratuity amount by multiplying the half-month income by the number of years of service.
The amount of gratuity an employee receives is determined by the most recent basic salary plus dearness allowances. Under the Payment of Gratuity Act of 1972, every employee who has worked for an organisation for at least 5 years is entitled to a gratuity.
What Are the Tax Rules for Gratuity?
The tax rules of a gratuity determine which type of employee must receive it.
- Any gratuity received by a government employee, whether from the federal, state or municipal government, free from tax
- Any other qualifying private employee whose employer is protected by the Payment of Gratuity Act 1972. In this case, the least of the following 3 will be free from tax
- A sum of ₹ 20 lakh.
- The amount of gratuity actually received.
- The gratuity that qualifies.
For the purposes of tax filing, all workers must follow the Income Tax Department’s regulations, and the Income Tax Act establishes the regulations for filing taxes.
Is Gratuity Taxable?
Gratuity received by a government employee on retirement, superannuation, or termination is exempt from tax under the Payment of Gratuity Act 1972. This applies to people who work for the state and the federal governments. A gratuity received by an individual will be considered part of his or her pay, making it taxable under current legislation. However, this tax is limited since the govt provides tax exemptions on gratuities earned under certain situations. Gratuities received by any nominee or heir on the death of an employee are subject to taxation, as they fall under the “Income from other sources” heading.
Gratuity tax exemptions for private company employees are determined by whether they are covered by the Payment of Gratuity Act of 1972. On the basis of these factors, different tax treatment is provided. Gratuities received by employees of the federal government, state governments, or local governments are tax-free. Employees of Statutory Corporation are not eligible for this exemption.
How to Check the Gratuity Amount?
The amount of gratuity is determined by the last drawn salary and the length of service. This sum is calculated using the following formula:
Last drawn salary {basic salary plus dearness allowance} x number of completed years of service x15/26
According to this method, a year is defined as a period of six months or more.
When a person has worked for the company for five years and seven months, the total period is counted as six years when computing the gratuity payment.
However, determining the gratuity amount, if the service duration is five years and five months, it will be counted as 5 years.
However, an employer can provide a high gratuity than the amount calculated.
Gratuity Amount Investment Options:
When it comes to managing your gratuity amount, exploring investment options becomes crucial for optimising returns and securing your financial future. Here are some investment avenues to consider:
Fixed Deposits (FDs):
Park your gratuity amount in fixed deposits for a safe and steady return. FDs offer a predetermined interest rate and various tenures, providing flexibility to align with your financial goals.
Mutual Funds:
Diversify your investment by considering mutual funds. They offer exposure to a range of asset classes, helping you potentially earn higher returns based on market performance.
Government Savings Schemes:
Explore government-backed savings schemes like Public Provident Fund (PPF) or National Savings Certificate (NSC). These provide secure options with tax benefits.
Equity Investments:
For those willing to take on some risk, investing in stocks can be an option. Equity investments have the potential for higher returns over the long term.
Real Estate:
Consider real estate investments, either by purchasing property or through Real Estate Investment Trusts (REITs). Real estate can provide capital appreciation and rental income.
Annuities:
Annuity plans can offer a regular income stream. You can use a portion of your gratuity to purchase an annuity, ensuring a steady flow of funds post-retirement.
National Pension System (NPS):
NPS allows you to contribute towards your pension fund, offering a mix of equity, fixed deposits, and government funds. It provides a pension during retirement.
Debt Funds:
Opt for debt funds for a balanced risk-return profile. These funds primarily invest in fixed-income securities, providing stable returns over time.
Before deciding on an investment option, consider factors such as your risk tolerance, financial goals, and the duration until your retirement. Checking across different investment instruments can help create a well-rounded portfolio tailored to your individual needs. Always consult with a financial advisor to make informed decisions based on your unique financial situation.
Calculation of Gratuity in Case of Employee’s Death:
The calculation of gratuity in the unfortunate event of an employee’s death involves specific considerations to ensure a fair and lawful settlement. Here’s a step-by-step guide:
Eligibility Criteria:
Confirm the eligibility of the deceased employee. Typically, gratuity is payable if the employee has completed at least five years of continuous service.
Determine Basic Salary:
Identify the employee’s basic salary at the time of their demise. Gratuity is calculated based on the last drawn basic salary and dearness allowance.
Calculate Completed Years of Service:
Determine the total number of years and months the employee has completed in service. Gratuity is calculated for each completed year of service.
Use the Formula:
Employ the gratuity calculation formula:
Gratuity = 15 * Last Drawn Basic Salary *Working Tenure / 30
Maximum Gratuity Limit:
Be aware of the maximum limit set by the government, which is ₹20 lakhs as per the latest amendment. If the calculated gratuity exceeds this limit, the excess amount is not payable.
Nominee or Legal Heir:
Identify the nominee or legal heir designated by the deceased employee. The gratuity amount is typically paid to the nominee, and if not specified, it is distributed among legal heirs.
Tax Implications:
Understand the tax implications associated with gratuity in the event of an employee’s death. As of the latest regulations, the entire gratuity amount is exempt from tax.
Legal Documentation:
Ensure that the necessary legal documentation, including the death certificate and relevant employment records, is in place to facilitate the smooth processing of gratuity.
Employer’s Responsibility:
It is the employer’s responsibility to settle the gratuity amount promptly and by the legal requirements. This may involve coordination with the nominee or legal heirs.
Seek Professional Advice:
In complex cases, seeking professional advice, such as consulting with a legal expert or financial advisor, can help you guide through the process. For more queries, contact the experts at Vakilsearch
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