A financial bonus that is regularly ignored yet has a large impact on an employee’s total salary is the Gratuity. The complexities of gratuity calculations are probably complicated, no matter their importance. In terms of CTC (Cost to Company), we talk about the topic of Gratuity in this article and tell you how Gratuity is calculated in CTC. So, keep reading this article to learn about Gratuity and its calculation in CTC.
What Is Gratuity?
The term refers to the amount that an organization will pay his employee, in return for services provided by him to the agency. However, employees who have been hired by the Employer for 5 years or more receive the gratuity amount.
Also Read:- How to Calculate Gratuity for Private Employees | How to Calculate Gratuity for Government Employees
How Do Gratuity Payments Work?
The company will salary the gratuity amounts out of their own pocket or buy a regular gratuity coverage plan from a service issuer. The company then will make annual payments to the employees, and the coverage employer, in return, will pay the employee the gratuity amount if the policy policies and regulations are followed. The organization’s salary is the complete gratuity sum without any contributions from the employee.
Regardless of the various years of non-stop employment, the regulation required that the organizations salary the Gratuity to the employee or their nominee if the employee was handicapped or died. The regulation, in addition, states that if the nominee is a minor, the assistant work commissioner needs to deposit the finances in the minor’s name in a time period deposit with a nationalized bank till the minor reaches the age of majority.
Eligibility Rules for Gratuity Payment – Employees
Any person satisfying the following eligibility criteria is eligible to acquire Gratuity under the Payment of Gratuity Act, 1972
- The person has to be eligible for superannuation.
- The person must have resigned after rendering a minimum of 5 years of non-stop employment in the same organization.
- According to Section 4 of the Gratuity Act, in case of termination of service due to loss of life or incapacity, an exception is made to the 5-year non-stop service standards.
- Furthermore, if an employee dies in harness, the beneficiary or nominee is taken into consideration for gratuity payment.
Eligibility Rules for Gratuity Payment – Organizations
Following are the organizations that fall under the Payment of Gratuity Act of 1972 to receive gratuity payments
- Organizations employing 10 or more employees
- Every company having 10 or more employees
- Every shop or established order employing 10 or more people on any day of the previous year (particular by the State Government or Central Government)
- Every organization concerned with the Gratuity Act whose employees are less than 10 are considered eligible.
How to Calculate the Gratuity Amount In CTC?
An organization can express gratitude to employees in diverse methods for their extraordinary service and hard work throughout their employment. Giving away gratuity payments is one such perk given to the employees.
Gratuity can only be withdrawn after working for 5 years at the time of leaving or retirement. People used to refer to gratuity amounts or calculations in various countries. The Act stipulates that Gratuity be paid at 15 days’ wages for each year of service finished, as much as a maximum of ₹10 lakh. Gratuity is paid at 7 days’ salary for every season in an establishment.
Gratuity is computed as 4.81 percent of basic salary under the Payment of Gratuity Act 1972. Here is the basic gratuity system for calculating the Gratuity earned by an employee based on the CTC amount:
Gratuity = 15/26* last drawn salary with allowance* a number of completed years of service.
Must Read:- Gratuity Calculator | How to Answer “What Are Your Salary Expectations?” | SDM Salary in India
Gratuity Calculation
Understanding how Gratuity is calculated is vital for both employers and employees, given its importance as a retirement benefit.
- Gratuity calculation is categorized into sections: one for employees under the Gratuity Act and the other for those not protected.
- The remaining drawn profits and the completed years of service are vital to compute Gratuity. The Gratuity payable is 15 days’ wages per year, derived from the common of the last 10 months’ salary.
For Organizations Covered by the Gratuity Act of 1972
If your administrative center follows the Gratuity Act, and you’ve worked for more than 5 years, your gratuity amount is calculated according to the following gratuity formula:
Gratuity= (15×Last Drawn Salary × Years of Service) / 26)
Let’s take an example
Mr. Sam worked at ABC Company for 11 years and 7 months, with a last-drawn salary of
INR 55,000.
Mr. Sam Gratuity Amount= (15×55,000×12)/ 26 = INR 380,769
For Organizations Not Covered under the Gratuity Act
If your place of business isn’t under the Gratuity Act, the formula for Gratuity changes a piece:
Gratuity= (15×Last Drawn Salary × Completed Years of Service) /30
For example, Mr. B labored at LMN Company for 15 years and 8 months, with a last drawn salary of INR 40,000.
Mr. B’s Gratuity Amount=(15×40,000×sixteen) / 30 = INR 3, 20,000
These examples show how Gratuity is calculated based on the rules that follow in your administrative center.
Gratuity Calculation in Case of Death of an Employee
In case of an unexpected death of an employee, the gratuity amount is going to their nominee. It is calculated based on the employee’s tenure and has a maximum limit of ₹20 lakh. The following table gives the gratuity amount payable by the Employer in case of an employee’s death.
| Tenure of Service | Gratuity amount payable |
| Less than year | 2 times the basic salary |
| More than a year but less than 5 years | 6 times the basic salary |
| More than 5 years but less than 11 years | 12 times the basic income |
| More than 11 years but less than two decades | 20 times the basic salary |
| Two decades or more | Half of the basic salary for each completed six-month period. |
Tax Implications Applicable to Gratuity
The taxation regulations on gratuity range for different kinds of employees. For authority employees, the gratuity amount is exempt from salary tax. However, for private employees included below the Gratuity Act, a limit is about for tax exemption on the gratuity amount.
The actual amount received by the employee and that calculated by using the above components are taken into consideration for tax exemption. The lower of the two values is relevant for tax exemption.
Consider this situation, let us think an employee acquired a gratuity of ₹9 lakh. But assume the Gratuity calculated according to components is simply ₹7 lakh. In this case, the tax exemption becomes relevant for ₹7 lakh. The stability amount, which is ₹2 lakh, can be taxable as per the existing salary tax slabs.
Conclusion
Gratuity is an important part of an employee’s salary package, and it’s far vital to apprehend how they’re calculated in the terms of CTC. The Payment of Gratuity Act of 1972 gives the strong foundation required to guarantee that employees achieve these rightful benefits as a fabric expression of appreciation for his or her continuous commitment and service.
FAQ’s:-
What is the most Gratuity payable to employees?
The most gratuity amount payable to an employee is 20 lakhs.
If the employee died during 1st to 4th year earlier than the completion of 5th year, then what would be the benefit for the employee’s nominee?
The employee’s nominee will get the gratuity payment from the Employer.
If the employee resigns at some stage in 1st to 4th year before completion of 5th year, then what will be the benefit for the employee?
The employee will not get any Gratuity Payment from the Employer.