7th Pay Commission: As per the Gratuity Payment Act 1972, the maximum gratuity an employee can receive is Rs 20 lakh, the entire sum is given by the company/organisation out of its own funds.
7th Pay Commission: In a major relief for crores of employees and pensioners across the country, the Central government earlier this week hiked the dearness allowance (DA) and dearness relief (DR) by four percent while also increasing House Rent Allowance (HRA) for central government employees living in the X, Y and Z category cities.
The Centre has also increased the tax exemption limit on gratuity from Rs 20 lakh to Rs 25 lakh for central government employees.
Gratuity amount and subsequently its taxation, can vary for central government employees in different salary slabs, thus making it highly important to know the new tax limits on gratuity as well as the total amount of gratuity one can expect to receive at the time of his or her retirement.
Here’s how we can calculate the gratuity amount one will receive at their superannuation by calculating the amount on a standard basic pay of Rs 15,000.
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Who and when is someone entitled to receive gratuity?
All employees of a company which has a staff of more than ten are entitled to receive gratuity under the Payment of Gratuity Act, 1972. As per current rules, a service class employee becomes eligible for gratuity after working for five years in the same company, however, the Centre may change this rule soon in the New Wage Code, under which an employee can receive gratuity after only one year of service instead of five years.
Notably, gratuity is only given at the time of retirement or if and when one leaves the job, even though an employee, as per prevailing rules, becomes eligible for gratuity after completing five years of service.
In case one dies while being employed or quit the job due to an accident, their nominee will receive the gratuity amount.
Who is ineligible for gratuity?
As per the current law, any employee, who has not completed at least five years working in the same company or left the job before the said period, is not eligible for gratuity.
Even if one leaves after 4 years and 11 months from the date of joining, they will be considered ineligible for gratuity, however, this rule can be relaxed in case the employee passes away or has to leave the job due to an accident.
How much gratuity can you receive?
As per the Gratuity Payment Act 1972, the maximum gratuity an employee can receive is Rs 20 lakh, the entire sum is given by the company/organisation out of its own funds. In this case, it is different that provident fund (PF), to which the employee also contributes 12 percent of his salary.
How is gratuity calculated under the Gratuity Payment Act?
Under the Gratuity Payment Act 1972, gratuity is calculated for employees divided in two categories; ones who come within the purview of the Act and ones who fall outside. Both private as well as public sector employees fall in these two categories.
How to calculate gratuity for employees falling under the Act?
For employees falling within the purview of the Act, gratuity is calculated using the following formula;
Last salary x length of service x 15/26
Last salary= Basic salary + dearness allowance + commission on sales (if any).
As per the formula, considering 26 working days in a month, the employee is paid by taking an average of 15 days.
Taking the example of an employee who has worked for 6 years in a company at a basic salary of Rs 15,000 per month, their gratuity will be calculated as 15000 x 6 x 15/26= Rs 51,923.
Notably, during the last year of employment, 6 months of service will be considered a full year.
Read More: 7th Pay Commission: How much gratuity one can get on Rs 15,000 basic salary; know calculations
How to calculate gratuity for employees NOT falling under the Act?
For employees who do not come under the purview of Gratuity Act, gratuity is calculated using this formula; Last salary x length of service x 15/30 in which Last salary equals Basic salary + dearness allowance + commission on sales (if any).
In this case, only a full year of service is considered in last year of employment, unlike the first case.
Again let us calculate the gratuity amount for an employee who has worked for 6 years in a company at a basic salary of Rs 15,000 per month. As such they will receive 15000 x 6 x 15/30 = Rs, 45,000 as total gratuity amount.
