Before the gratuity act of 1972, private organizations did not offer a gratuity payout towards retirements, hence making life a bit difficult post-retirement. However, with the advent of the Gratuity Act of 1972, this benefit was not limited to government employees alone, and the private sector was inducted into the gratuity act.
For any salaried individual, gratuity is a specified amount that is paid out by the employer as a token of loyalty for the services rendered by the employee during his or her tenure with the company. In most cases, one chooses to accept the payout at the time he or she retires. However, this is not a rigid rule and can be availed earlier, given the situation conforms to certain gratuity rules, such as:
- The employee should be eligible to enjoy retirement benefits (Superannuation)
- Retirement due to age
- Resignation after five years of employment with the organization
However, in the event of death or permanent disability within five years, the employee is entitled to gratuity payout in line with the Payment of Gratuity Act, 1972.
Every company has its gratuity calculator. It is usually subject to limiting factors like the last drawn salary (gross) that includes the basic pay, a dearness allowance that depends on the organization's fiscal decisions, and commissions, if applicable. All this is factored in, while the gratuity calculator gives you an accurate estimate of what the payout might amount to. This depends on what your last drawn salary might be at the time of availing the gratuity.
What Is A Gratuity Calculator?
A gratuity calculator is an algorithm-based tool that helps an employee, based on his/her tenure and last drawn salary, estimate the gratuity payout he or she is eligible for.
Most companies hire stable employees looking to spend a long tenure with the organization; gratuity calculators do not limit themselves to group calculations as they operate based on individual salaries and tenures.
Usually set to rigid factors, gratuity calculators conform to the rules set by the Payment of Gratuity Act and hence does not factor in arbitrary data. This tool eases lives, and unlike olden times, employees can be carefree of accounting errors and human intervention, a huge issue they would have had to endure in the past.
Features of Gratuity Calculators
Gratuity calculators are a super smooth way of moving in and out of hundreds of plans based on what you are looking for. Some of the salient features offered by these calculators are as follows:
Gratuity calculators are, by simple logic, not generic. They utilize data personalized for each employee and provide real-time results based on the employee’s last drawn salary and tenure, which is a variable in each case, hence returning personalized results.
Any employee can estimate what he or she might be drawing in terms of salary in the future to take a quick look to estimate what his or her gratuity payout might amount to.
Ease of Use
Anyone can use this tool. What makes it such a user-friendly feature is that it does not have unnecessary demands in terms of details for calculations, hence making sure you know exactly what to expect.
Benefits of Gratuity Calculators
Some of the core benefits of Gratuity Calculators are discussed below:
The one thing that does not cost a working employee vast amounts of time, and helps to estimate a gratuity amount without errors, is a tool that does all the work based on your assumptions. It also saves the employee from wasting time on manual calculations and instead of helping him or her concentrate more on zeroing in on long-term planning.
Because these calculators are hardcoded tools based on stringent algorithms, there are zero scopes of errors. Hence, it returns accurate estimates based on the input provided by the user.
Gratuity calculators are algorithm-driven and are purely based on the data furnished by the user. Given that there is minimal human intervention in terms of the end-user data reliability, the possibility of errors is eliminated. This, of course, relies on the user’s data input.
Saves on Back and Forth Trips
There used to be a time when a hassled employee would have to undertake physically and mentally tasking trips to the accounting department. With the emergence of gratuity calculators, the need for this was eliminated over time. The employee can get estimates with a simple click.
Putting this tool to prudent use not only saves a lot of time for the user, but it also sets a limit on quite a lot of menial work, hence enabling the user to eliminate the use of wild guesses.
Gratuity calculators not only provide complex calculations in simple unclouded forms, but they also help in making rational estimates so that you can plan your engagements with your employer. Hence, disallowing for compromises of any manner.
Why Should One Use Gratuity Calculators?
The introduction or gratuity calculators eliminated this drawback. Any user who wishes to enter a contract deserves to know if there could be better scenarios and if he or she can settle in life peacefully. Some reasons why one should use a gratuity calculator is as follows:
They have been developed for users
These tools exist for the sole purpose of easing a user’s life. In such a case, companies would want to offer hassle-free processes. These tools are user-friendly and are easy to use.
The majority of the gratuity calculators provided online are straightforward and offer a streamlined experience. There is a wide scope of possibilities to explore due to the flexible design of these calculators
Planning your life
The user can plan his professional life on the spot. This also helps him, or she gives their budget a structure, hence improving their money-management skills. Gratuity calculators are extremely useful when it comes to planning future financial expenses
Nothing is hidden in the results a gratuity calculator fetches because the user has the right to know what to expect from his or her job and his current role at his or her organization
Putting this tool to prudent use not only saves a lot of time for the user, but it also exempts the user's bracket on limitations in terms of estimations, hence enabling the buyer to bypass the “wild guess” part of understanding what he or she is entitled to.
Factors Affecting Gratuity Calculators
Gratuity calculators are super-efficient because they have been programmed to return exact figures based on inputs provided by the user. Although it solely depends on an employee’s salary and tenure in an organization, it falls into two broad categories for non-government organizations, such as:
Gratuity returns for employees covered under the Gratuity Act
Gratuity eligibility, in this case, is defined by a scenario where an employee who is a part of an organization that employs at least ten employees on any given day for twelve months automatically qualifies for gratuity benefits.
Gratuity returns for employees not covered under the Gratuity Act
Although there no hard and fast rule, an organization is not in the purview of the Gratuity Act may choose to provide for gratuity benefits for its employees.
According to the pensioner’s portal, gratuity is calculated as 1/4th of the monthly basic pay, including dearness allowance drawn for every six months completed during the tenure. The gratuity payout, hence, is payable to an amount of 16 times the basic pay not exceeding 20 Lakh INR. This is the optimal scenario for an employee retiring at the end of his/her tenure with the organization.
However, as discussed earlier, gratuity payouts are not limited to retirement. Here are other scenarios where an employee is eligible for a gratuity payout.
|Tenure (In Years)||Gratuity payout|
|>1 but <5||6*Basic Pay|
|>5 but <11||12*Basic Pay|
|>11 but <20||20* Basic Pay|
|>20||Half of every six months' salary limited to a maximum of 33 times.|
However, the organization may choose to forfeit gratuity payouts for an employee whose employment has been terminated.
All gratuity calculators operate on the same formula set forth by the Gratuity Act.
For employees covered under the Gratuity Act
Gratuity is calculated using the formula n*b*15/26
Where n=Tenure completed in the organization,
B = Last drawn basic + Dearness allowance.
The number 15 is a calculation of 15 days of each completed year. The number 26 is the number of working days in a month.
For employees not covered under the Gratuity Act
For employees not part of an organization under the purview of the Gratuity Act, the gratuity calculated uses the formula
Where n= Tenure completed in the organization,
b = Last drawn basic + Dearness allowance.
The number 15 is a calculation of 15 days of each completed year. The number 30 is the average number of days in a month.
Let us take an example in both cases:
A. For an employee covered by the Gratuity Act, let us assume that he has spent 15 years at the organization and has drawn a basic pay of 50000. In this case, the gratuity to be calculated will be
(15*50000*15)/26 = 4,32,692 INR.
Where n is the tenure spent at the organization, and 26 is the number of average working days in a month.
B. For and employee not covered by the Gratuity Act, let us assume she is subject to the same factors as the employee covered by the Gratuity Act. In this case, her gratuity will be calculated as
(15*50000*15)/30 = 3,75,000 INR.
Where n is the tenure spent at the organization, and 26 is the number of average working days in a month.
Carrying this example, you may note that both these payouts are eligible for tax exemptions as they follow under the norms of the tax treatment for gratuity payouts.
How to Use Gratuity Calculator
When using a gratuity calculator, it is impertinent that the buyer is aware of what he or she is eligible for and keeping in mind what he or she is aiming for in terms of stability. As we now know, that gratuity calculator has a stringent set of factors and one single task to execute, the returns a gratuity calculator yields would be based purely on the user’s inputs.
Here is a general step-by-step process to use a gratuity calculator.
Step 1: Although free, users will have to log in to the gratuity calculator on any website that provides for one.
Step 2: Once logged in, all the user needs to do is enter his/her last drawn salary that is inclusive of applicable commissions and dearness allowances.
Step 3: Enter the tenure spent at the organization.
Step 4: Usually, the calculator asks the user if his/her organization is covered under the Gratuity Act 1972. If your organization has had you fill in details for gratuity returns, you are covered. It is best to confirm with your accounts/payroll departments to be sure.
Step 5: Enter the commission, if any.
This should give the user results revolving around his or her salary estimations. Please note that such calculators can only provide estimates, and employees should ensure that any changes that may affect them are kept in mind so that last-minute changes don't blindside them.
Gratuity Pay-Out Timeline
There is usually a general procedure involved regarding a gratuity payout.
Initiation: The first time any communication regarding a gratuity payout initiated by an employee is known as the initiation. The employee sends out a letter of intent to the employer.
Acknowledgement and payout calculation: This is where the company would ideally employ the use of a gratuity calculator. The employer, after calculating the payout amount, sends out a notification to the employee.
Disbursal of the payout: The gratuity is disbursed within 30 days of sending out the notification.
Taxation on Gratuity Pay-Outs
Government employees being paid a gratuity are exempt from income tax. However, for a non-government employee, the exemption is subject to three major categories, the least of which will be exempt from income tax.
- INR 20 Lakh
- The actual amount of the gratuity payout
- Half month emoluments for every six months completed by the employee
Any amount that falls under any of the above is exempt from income tax under section 10(10D) of the Income Tax Act.
In closing, although salaries vary, a gratuity calculator will return exact figures based on inputs that might also be estimated projections from someone trying to understand what he/he might be entitled to in the future.
Update: There have been reports of a raised ceiling on gratuity payments to be rolled out from the next fiscal. According to the new budget, the ceiling has been raised from the current 20 Lakh to 30 Lakh and is eligible for tax exemptions.
Ans: Gratuity calculators are tools that help one calculate the gratuity payout values he/she is entitled to upon retirement. These are highly advanced tools as they require a lot of estimations and scenarios to run through before returning the most optimal results.
Q: Will an employee be eligible for a gratuity if the employee has served 3.5 years at his or her organization?Ans: Following the court ruling, an employee will only be eligible for a gratuity payout if he/she has spent a minimum of 5 years with an organization. However, the exception to this rule would be an unfortunate death or a disability within 5 years, in which case, the nominee will be receiving a gratuity payout.
Ans: If the employee is part of the company’s payroll, and the company is n purview of the Gratuity Act, then yes. If the employee is not part of the payroll, then his/her outsourcing company will have to bear the gratuity for the employee.
Ans: Yes. The gratuity payout can, under no circumstance, exceed 20 Lakh INR.
Ans: In usual cases, the gratuity is to be rolled out anywhere between 30 to 45 days from the last day served. This is usually a part of the full and final settlement a company rolls out.
Ans: For any gratuity calculator to calculate the payout amount, the last drawn salary is not counted as the gross salary but rather the basic pay, dearness allowances, and commissions on sales, if applicable.
Ans: Gratuity calculators consider the last drawn salary and the tenure of service of an employee to return gratuity payout amounts.
Ans: A gratuity, or the gratuity payout, is the amount payable to an employee at the end of his/her tenure. For one to calculate his or her payout amount, he/she needs to be aware of the salary they are drawing and the tenure spent. It would be wise to remember that one is eligible for gratuity only if he/she has spent at least 5 years with the organization.
Ans: No, because the employee does not contribute towards the gratuity fund, the gratuity payout does not fall under exemption criteria.
Ans: Yes. While joining an organization, employees are usually required to fill out Form F and add a nominee.
Ans: Gratuity payouts are, simply put, loyalty payouts handed out to employees for serving tenures at their organizations. The circumstances under which a gratuity is paid out to an employee are:
- Death or disability
- Voluntary retirement under the Voluntary Retirement Scheme (VRS)
Ans: Because the amended Gratuity Act has set a ceiling of 20 lakhs, the employee is eligible for a maximum amount of 20 lakhs as a payout. However, at the company’s discretion, it may choose to pay an amount over the gratuity in the form of a bonus or ex gratia.
Q: If an employee serves 4 years and 8 months at his/her organization before resigning, will he or she be eligible for a gratuity payout?Ans: Unfortunately, no! For an employee to be eligible for a gratuity payout, he/she needs to spend a minimum term of 5 years. Here, because the total tenure spends 4 years and 8 months, the tenure will be rounded off to 4 completed years and not 5.
Ans: Yes, as long as the employee has not resigned and has completed at least 190 days (Organizations that operate for less than 6 days a week) to 240 days (Organizations are operating more than 5 days a week). This includes sick leaves, paid leaves, lockdowns, strikes, and layoffs.
Ans: Apprentices, any employee already enrolled for gratuity, and employees who are eligible for payouts more favorable than the gratuity act.