Learn about your compensation in our blog and find out why gratuity percentage matters and understand how gratuity is calculated.
Introduction
The Payment of Gratuity Act 1972 defines gratuity as a reward that is paid to employees. It is a monetary award given by an employer to an employee in appreciation of his or her contributions to the company. That is why learning how is gratuity calculated in CTC becomes crucial for employees.
It is usually a proportion of an employee’s compensation, and there is no defined percentage of the gratuity amount that can be received.
In contrast to the provident fund, the gratuity is provided entirely by the employer, with no contribution from the employee.
The Payment of Gratuity Act 1972 establishes the monetary amount that is payable to an organization’s employees. This is mostly given to the employee as a symbol of gratitude for his or her contributions to the organization. The gratuity payment is one component that makes up the employee’s gross wage. Gratuity is a one-time payment made by an employer to an employee to show appreciation for their contributions to the company. It’s critical to understand an employee’s eligibility and the amount of gratuity he or she will earn. The Payment of Gratuity Act 1972 regulates the amount of money an organization’s employee deserves. Understanding an employee’s eligibility and the amount of gratuity he or she would receive is crucial.
What is Gratuity in Salary?
A gratuity is money that an employer gives to staff members who have worked for them for at least five years. A gratuity is a benefit plan that is paid to an employee as part of their compensation and is intended to support them in their retirement. It is included in the employee’s salary and serves as a benefit plan intended to support the employee during retirement.
Eligibility for Gratuity Payments
- You should qualify for superannuation
- You should have retired from service
- You should have resigned after five years of continuous employment with the company
- In the event of your death, the gratuity is paid to your nominee, or to you in case of disablement due to illness or accident.
How Do Gratuity Payments Work?
The employer can pay the gratuity amount out of their own pocket or purchase a generic gratuity insurance plan from a service provider. The firm then pays annual payments to the service provider, and the insurance company, in turn, can pay the employee the gratuity amount if the policy rules and restrictions are followed. The employer pays the entire gratuity sum with no contributions from the employee.
Regardless of the number of years of continuous employment, the law requires that the company pay the gratuity to the employee or his or her nominee if the employee becomes handicapped or dies. The law further states that if the nominee is a minor, the assistant labor commissioner must deposit the funds in the minor’s name in a term deposit with a nationalized bank until the minor reaches the age of majority.
There are some rules that must be followed when making a payment. When an employee is entitled to gratuity, the rules indicate that they must apply within 30 days of the day the gratuity becomes payable. The application can be made sooner than 30 days if the date of superannuation or retirement is known. An employer, on the other hand, is not entitled to reject an employee’s application after the 30-day period has passed if the delay is due to a justifiable reason. The guidelines further state that no gratuity claim would be considered invalid just because the applicant did not file his or her application within the required time frame. The Payment of Gratuity Act 1972 has no bearing on an employee’s right to higher gratuity conditions under any award, agreement, or contract with the employer. In relation to an establishment belonging to or under the control of the Central Govt. or having branches in more than one state, or an establishment of a factory belonging to or under the control of the Central Govt, or a major port, oil field, or mine, the appropriate government is the Central Govt.
How is gratuity calculated in CTC?
An employer can express gratitude to employees in various ways for their exceptional service and hard work throughout their employment. Giving away the gratuity money is one such perk provided to the workforce.
Gratuity can only be withdrawn after working for five years at the time of leaving or retirement. People used to refer to gratuity amounts or calculations in various countries. The Act stipulates that gratuity be paid at 15 days’ wages for each year of service completed, up to a maximum of ₹10 lakh. Gratuity is paid at 7 days’ earnings for each season in a seasonal establishment.
Gratuity is computed as 4.81 percent of basic pay under the Payment of Gratuity Act 1972.
Here is the basic gratuity formula for calculating the gratuity earned by an employee based on the CTC amount:
Gratuity = 15/26* last drawn salary{ basic salary dear allowance}* a number of completed years of service.
How Is Gratuity Collected for Private-Sector Employees with Example?
Any employer in the private or governmental sector with ten or more employees is required to pay gratuity to all employees. It is a monetary incentive for working for the company. It serves as a retirement benefit and is included in a post-retirement plan.
Use following gratuity formula to calculate the gratuity amount.
Gratuity=AB15/26 where,
- A is (number of years of employment in a company) • B is (latest drawn salary) • 15 is wages for 15 days and 26 is the number of days in the month Basic Salary Dearness Allowance
- The last drawn salary includes the basic wage, dearness allowance, and sales commission.
- The gratuity payable in the event of retirement is 16 times the base wage, up to a maximum of ₹20 lakhs.
- In the event of an employee’s death, a gratuity is provided based on the duration of service, with a maximum benefit of Rs. 20 lakhs. In the event of death, the following gratuity will be paid.
Mr. X has worked at PNR Firm for ten years, and his most recent salary (Basic Dearness Allowance) was ₹30,000. As a result, Mr. X’s gratuity would be – 10 x 30,000 x 15/26 = ₹1,73,076 (Gratuity is calculated based on the total number of years worked for the company and the last income earned).
FAQs
What is Gratuity on CTC in India?
Gratuity on CTC refers to the process of including the gratuity component as part of the ‘Cost to Company’, wherein the employer considers gratuity in the overall compensation package for employees.
How is gratuity calculated as part of the Cost to Company (CTC)?
Gratuity is typically calculated as a percentage of the employee's basic salary and may be included in the CTC as a long-term employee benefit.
Is gratuity mandatory as part of the CTC for employees in India?
While not mandatory to include in CTC, some employers may include gratuity as a component of CTC to provide a comprehensive compensation package.
What is the formula used for calculating gratuity in the CTC structure?
The formula for gratuity calculation involves factors like years of service and last drawn basic salary + dearness allowance. It is usually calculated using the formula: (15/26) * number of years * last drawn basic salary + dearness allowance.
Can employees opt out of including gratuity in their CTC?
In general, employees may not have the option to opt out of including gratuity in their CTC, as it may be a part of the standard component.
Does the inclusion of gratuity in CTC affect the overall take-home salary of an employee?
Yes, including gratuity in CTC impacts the overall take-home salary, as it is part of the total compensation package. However, the actual gratuity payment is made upon fulfilment of eligibility criteria.
How does the tenure of employment impact gratuity as part of CTC?
The longer the tenure of employment, the higher the gratuity amount, as it is typically calculated based on the number of years of service.
Is the gratuity amount fixed or does it vary based on the employee's salary?
The gratuity amount varies based on factors like the employee's last drawn basic salary and the years of service, following the prescribed formula.
Are there any tax implications for employees on gratuity included in the CTC?
Yes, while there are tax exemptions on gratuity, there are certain limits. The exempted amount is capped at Rs. 20 lakhs.
Can employees negotiate or customize the gratuity component in their CTC during the hiring process?
Negotiation possibilities may vary, but employers often have standard practices for including gratuity in CTC. Employees may have limited flexibility regarding gratuity inclusion.
What is the significance of '15/26' in the gratuity calculation formula?
The ’15/26’ in the gratuity calculation formula signifies that an employee earns 15 days of wages for each year of service, divided by 26, which represents the number of working days in a month. This fraction standardises the gratuity amount relative to the employee's monthly salary.
What are the detailed tax implications for gratuity received by nominees or legal heirs?
Gratuity received by nominees or legal heirs is fully exempt from income tax under Section 10(10) of the Income Tax Act,1961. However, the amount must be declared for documentation purposes. This exemption applies only to gratuity paid due to the employee's death; otherwise, normal tax rules for gratuity apply.
How do gratuity calculators work for estimating gratuity amounts?
Gratuity calculators estimate the gratuity amount based on factors such as the employee's last drawn salary, years of service, and applicable laws or company policies. Users input this data, and the calculator applies the standard formula to provide an estimate, helping employees plan their finances post-retirement or resignation.
Read More:
- How Does Gratuity Calculator Works?
- Check out Gratuity Formula and How to Calculate Gratuity
- All You Need to Know About the Gratuity Rule
