Gratuity Calculator Online: Formula, Tax Exemptions, and More!

 

A gratuity calculator, as the name suggests, is a tool used to calculate the gratuity amount. With the correct entry, you can get the exact value of the gratuity amount you will receive from the employer for your continuous services. 

However, there could be times when you won’t have access to the calculator. In such a case, you must know the gratuity formula. Again, that’s not enough! You must also know the taxes applied and exempted. So, to ensure you don’t miss out on any crucial info related to the gratuity, stay with us until the end of the blog. 

What is Gratuity?

Gratuity is defined as the amount employees receive from their employers for working continuously for at least five years in the organization. It’s basically a token of appreciation for employees in return for their services to the company. 

The gratuity is regulated by the Payment of Gratuity Act, 1972. As per the act, the employee can receive the gratuity money before five years in case he/she becomes disabled due to a disease or in an accident. 

The gratuity amount specifically depends on the years of service you have provided to the organization and the last drawn salary. 

To know how to calculate the gratuity amount and how to use the gratuity calculator, keep on reading. 

Formula for Calculating the Gratuity Amount

We will calculate the gratuity amount for two categories:

1. Ones whose employers fall under the Gratuity Act, and
2. Ones whose employer doesn’t fall under the Gratuity Act.

We will start with the first one.

a) Calculating the Gratuity Amount of Employees Whose Employer Falls under the Gratuity Act

The formula for calculating the gratuity amount, in this case, would be:

Gratuity = n x b x 15 / 26

Where n = numbers of years of service in the organization

b = last drawn basic salary + dearness allowance

For instance, you worked with the ABC company for 10 years. Your last drawn basic salary and the DA (Dearness Allowance) was ₹ 40,000. 

Therefore, the gratuity amount = 10 x 40,000 x 15/26 = ₹ 2,30,769.

Points to be Noted:

According to the Payment of Gratuity Act, 1972, the gratuity amount can’t exceed ₹ 20 lakh. Any extras will be considered as ex-gratia. 

In case your tenure in the previous year of employment exceeds six months, then round it off to the nearest figure. Assume that your years of service to the organization is 15 years 8 months, then you will get the gratuity for 16 years. However, it would have been 15 years if your tenure was 15 years 3 months.

b) Calculating the Gratuity Amount of Employees Whose Employer Doesn’t Fall under the Gratuity Act

In such a case, you can calculate the gratuity according to the half-month salary on each year of service you have completed. 

The formula for calculating the gratuity amount, in this case, would be:

Gratuity = (15 x Your last drawn salary x the working tenure) / 30.

For instance, you earn a basic salary of ₹ 40,000. You have offered a consistent service of 8 years and the employer doesn’t fall under the Gratuity Act. Therefore, 

Gratuity Payment = (15 x 40,000 x 8) / 30 = Rs 1,60,000. 

How to Use SquareYards’ Gratuity Calculator?

SquareYards’ gratuity calculator has been designed with an easy-to-use interface. Hence, it’s pretty simple to operate it. Follow the steps below to know how to use our calculator:

Step 1: Enter the last salary drawn (i.e. the basic salary and dearness allowance). 

Step 2: Enter the total tenure or years of service with an organization.

Step 3: Click on the ‘Submit’ button.

Step 4: Our gratuity calculator will return you with the gratuity amount payable in seconds.  

Step 5: You can follow the same step to recalculate the gratuity anytime by simply changing the basic salary and number of years of service. 

How can a Gratuity Calculator Help You?

A Gratuity calculator can benefit you in many ways. The gratuity calculator by SquareYards is a user-friendly universal tool, where you have to enter your last drawn salary and years of tenure. 

It provides you with a precise amount that you will get after five years or more of consistent service to an organization. 

The gratuity calculator will reveal the gratuity amount in the blink of your eyes. It helps you organize your finances by intelligently investing the amount and getting the maximum return. 

Another significant feature of this calculator is that you can access it from anywhere. 

Gratuity Taxation Rules

The tax on gratuity depends solely on the nature of employees receiving it. 

1. Any government employee (state/central/local authority) receiving the amount of gratuity is exempted from the income tax. 
2. Any eligible employee of a private organization whose employer falls under the Gratuity Act will have to pay tax if he/she doesn’t fall under tax exemption categories. 

In this case, the least of the following three categories will be exempted from the tax:

• ₹ 20 lakhs
• The eligible gratuity, and
• The actual amount of gratuity received

Tax Exemptions on Gratuity

As per recent amendments in the Payment of Gratuity Act, 1972, the least of the following categories is exempt from the tax:

• The actual gratuity received;
• The last salary (basic + dearness allowance) x number of years of tenure x 15/26;
• ₹ 20 lakhs (which has been increased from ₹ 10 lakh as per the new amendment). 

Let us understand this with the help of an example.

Assume that Sanjeev’s last drawn salary is ₹ 4 lakh per month (Basic + Dearness Allowance). He served the organization for 6 years and 8 months. Therefore, he is entitled to receive a gratuity amount of ₹ 16,15,384.6. 

Now let us understand the tax exemption considering both previous and new amendments in the Act. 

Note:

• Number of years of service or the total tenure is rounded off to the nearest full year.

• The previous 10 months’ average salary is considered. 

Where should You Invest Your Gratuity Funds?

Gratuity payment is a handsome amount of money that you receive as a token of appreciation in return for your service to the organization. But the primary drill here is where to keep this money. Should you invest it somewhere or save it in your bank account?

Before concluding anything, you must first decide- whether you would need the money for the next three years? If yes, you should opt to make a fixed deposit of the gratuity amount.

However, if you won’t need that money for a long time, you should choose to invest in mutual funds or the equity market. Obviously, you should have experience dealing in the stock market, or you will lose out on your money. Plus, you will need extensive research before trading the fund for stocks.

Therefore, whatever your plan is- make sure that you are pretty confident about it. Ensure that you are putting your money in the right stock with better prospects.

Frequently Asked Questions (FAQs)