Gratuity Act: Gratuity Formula under the Gratuity Act 1972 says that an employee becomes eligible for the loyalty benefit if he has completed five years of regular service. Gratuity Act 1972 says that an “Employee” under the Payment of Gratuity Act means any person employed on wages for doing any type of work, including those hired in the managerial or administrative capacity. The key consideration for gratuity payment is that the person should be employed on wages. Those employed as apprentices are not eligible for gratuity.
Highlighting the circumstances when the Gratuity payment becomes applicable; SEBI registered tax and investment expert said, “The gratuity is paid to an employee on the termination of his employment after he has served for five continuous years. In the case of death of the employee, five continuous years of services is not mandatory.”
Gratuity calculator
The Gratuity amount is calculated differently for monthly-rated, piece-rated and seasonal employees. Here are some key points considered for gratuity calculation:
1] The wage considered for calculation is the last drawn salary; and
2] Allowances other than Basic and DA are not considered for gratuity calculation.
During gratuity calculation, 15 days of wages multiplied by (Basic + DA) of each year of completed service is considered for calculation. The per-day wage of the employee is calculated by dividing the monthly wage by 26.
Service rendered by the employee for more than six months is considered as one year.
So, the formula for Gratuity Calculation is [{(Basic + DA) x 15}/26] x number of years.
Let’s use the Gratuity formula with this example. Suppose an employee joined on 1.7.2006 and left the job on 30.3.2020, with last drawn basic Salary of Rs 25,000 and DA of Rs 10,000, his Gratuity will be:
[{(25000 + 10000) x 15} / 26] x 14 = Rs 2,82,692.30
Here, the employee has served its organisation for 14 years because it’s 9 month service in the first year would be considered as one year during gratuity calculation.
Gratuity Limit
The maximum amount of gratuity that can be paid to an employee is Rs 20 lakh. The employer can, however, pay more gratuity than the prescribed ceiling. The payment of gratuity is made either to the employee at the time of his retirement, or termination or to the legal heir in case of death of the employee.
