What is Gratuity? Know About Payment of Gratuity Act 1972

What is Gratuity?

Gratuity is a kind of a retirement benefit that a company is bound to give its employees, provided that an employee has completed five years of service. Once a company starts employing more than ten people in a financial year, it automatically falls under the gratuity act. After this, even if the number of employees falls below 10, the company is bound to pay gratuity.

Many companies that are not bound by the Payment of Gratuity Act 1972, i.e., firms with less than ten employees like start-ups, also benefit their employees but the calculation of gratuity amount changes in that case.

Gratuity is paid at the time of retirement or on resigning from a job. It is only paid before completing five years of service if there is an accident, death, or permanent disability.

Know your gratuity amount

If you have been working for many years, you would most probably have gathered a sizeable corpus as gratuity. Being aware of this amount becomes important to plan your post-retirement finances. There is no need to depend on anyone to find out your gratuity amount. The government portal gives the formula to calculate this –

  • Gratuity= (1/4) * (Basic Salary + Dearness Allowance) * Number of 6-month periods completed.
  • Thus, it is 16 times the basic pay.

But there’s more to this. Your gratuity will be calculated based on the kind of company you work in. who will use either of the below-given formulas to calculate –

The formula for companies that fall under the Payment of Gratuity Act 1972 (companies with more than ten employees):

Gratuity = Previous salary (before leaving) x (15/26) x Total Number of years worked.

  • Here, 26 days are counted as a working month with 15 days (half month) salary for gratuity calculation.
  • For instance, if an employee drew Rs. 1,00,000 as his last basic salary, with ten years and four months of working tenor, then his gratuity will be:
  • 1,00,000 x (15/26) x 10 = Rs. 5.76 lakhs

Work tenor is taken as ten as months are rounded off; if it had been six or more than six months, a tenor of 11 years would’ve been assumed.

The formula for companies that do not fall under the Payment of Gratuity Act 1972 (companies with less than ten employees):

Gratuity = the Previous salary before leaving x (15/30) x Total no. of years worked

  • The only difference here is that 30 days are accounted for a month.
  • So keeping parameters like the example in formula 1; the gratuity will be:
  • 1,00,000 x (15/30) x 10 = Rs. 5 lakhs

Gratuity amount is tax-free; unless it exceeds Rs. 20 lakhs. However, if your company contract mentions that you can exceed this limit like a term of meaningful employment, then the additional gratuity you receive will be termed “ex-gratia.”

How to utilize gratuity optimally?

As mentioned earlier, this money can play a vital role in providing you with a peaceful retired life. The trick is to invest it and let it grow even further. The wise ones prefer to put their gratuity money in a place of low-risk and medium to high returns.

So a company fixed deposit like Bajaj Finance Fixed Deposit (FD) emerges as a powerful option. With some of the best FD interest rates (up to 8.70%) and India’s highest credibility ratings (CRISIL’s FAAA/Stable and ICRA’s MAAA/stable), Bajaj Finance FD is a great way to grow your savings.