Gratuity Meaning and Calculation: What You Need to Know
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One of the financial benefits that working professionals in India look forward to at the time of retirement or when changing jobs is the gratuity. However, not many understand the gratuity meaning and how its calculation works. This article aims to demystify the concept of gratuity, its eligibility criteria and calculation process for a better understanding.
Understanding Gratuity Meaning
Gratuity is a lump sum payment made by an employer to an employee as a form of gratitude for the services rendered by the employee during the tenure of their employment. This financial benefit is governed by the Payment of Gratuity Act, 1972 in India. Both public and private sector employees are eligible for this statutory right. However, the act applies to organizations employing ten or more workers on any single day of the preceding twelve months.
Eligibility Criteria for Gratuity
According to the Payment of Gratuity Act, to be eligible for gratuity, an employee must have rendered continuous service for at least five years in a single organization. However, it’s important to note that once this criterion of five continuous years of service is met, the gratuity is paid, irrespective of age or any other factor. Exceptions to the five-year rule apply in the event of the employee’s death or disablement due to accident or disease, whereby the gratuity would be paid to the nominee or the employee, as the case may be.
Gratuity Calculation Process
The gratuity calculation involves the following parameters: basic salary, dearness allowance, and number of completed years of service. The gratuity formula applicable to an employee depends upon whether the organization falls under the Payments of Gratuity Act or not.
For organizations that fall under the Act, the formula used is:
Gratuity = (Basic salary + Dearness allowance) x 15/26 x number of years of service
For organizations that do not come under the Act, the formula used is:
Gratuity = (Basic salary + Dearness allowance) x 1/2 x number of years of service
Here, the dearness allowance is calculated as a percentage of the basic salary, while the number of years of service is rounded down to the nearest whole number. Kindly note, the maximum gratuity amount that can be received under the act is Rs 20 lakhs.
Disclaimer:
While this article provides information on gratuity meaning and calculation, it is crucial to know that the mentioned processes and formulas should be treated as a guide only. It does not provide specific advice and should not serve as the sole basis for any financial decisions. As an investor, it is necessary to understand all the pros and cons of trading in the Indian financial market and make decisions accordingly.
Summary:
Gratuity is a financial benefit given by an employer to an employee for their services during their employment period. The Payment of Gratuity Act, 1972 governs it, and it applies to organizations with ten or more employees. The eligible criteria for gratuity are a minimum of five continuous years of service in a single organization. The gratuity calculation depends upon whether the organization is covered under the Act or not. Gratuity is calculated using the basic salary, dearness allowance, and completed years of service. However, investors must weigh all aspects of the Indian financial trading market before making any decisions.
