Gratuity calculator: Everything an employer should know

Who can claim Gratuity?

Gratuity eligibility in India depends on several specific criteria which is not a usual process in most cases. Here are some cases where you are qualified to claim gratuity

Minimum Service Period: You must have completed a minimum of five years of continuous service with the same employer. However, there may be variations depending on your specific employment contract or company policy.

Retirement: Upon reaching the retirement age as defined by your company or national regulations. Gratuity on retirement is comparatively higher than resigning in between.

Resignation: Gratuity on resignation depends on your service period. If you choose to resign after completing the minimum service period (usually five years or more).

Death or Permanent Disability: In unfortunate circumstances, even if you haven't completed the minimum service requirement, your family or nominee might be eligible for gratuity if your service is terminated due to permanent disability arising from an accident or illness, or in case of employee death.

How Gratuity is Calculated?

1. Employer Covered Under the Act:

If your employer is covered by the Act, the more favorable formula applies:

Gratuity Amount = (Last drawn salary * 15/26 * Number of years of service)

Here, the number 26 represents the assumed number of working days in a month. The 15/26 factor translates to receiving a gratuity payment for 15 days' salary for every completed year of service.

2. Employer Not Covered Under the Act:

If your employer isn't covered by the Act, a slightly different formula is used:

Gratuity Amount = (Last drawn salary * 15/30 * Number of years of service)

In this scenario, the denominator is 30, reflecting the standard number of working days in a month.

Which employers come under the Gratuity Act?

The Gratuity Act 1972 applies to a vast range of establishments in India. They need to have at least 10 workers to give the gratuity payment. These are industries that are covered under the

Gratuity Act

Factories with the manufacturing process

Mines with valuable mineral extraction and oil fields with exploration and extraction space.

Plantation estate like coffee tea rubber.

Ship docks or ports.

Railway companies who are operating train services.

The companies who are registered under the Companies Act.

Shops and establishments like retail stores, hotels, offices, and restaurants with more than 10 workers.

Exceptions: The government establishment department offices that are covered under separate gratuity schemes established by the government are generally exempt from the act.

How gratuity can be claimed?

1. Submit a Written Application: Once your employment terminates due to retirement, or resignation after completing the minimum service period, death, or permanent disability, submit a written application to your employer requesting gratuity payment. It should clearly state the gratuity amount and the reason for terminating employment permanently.

2. Attach Necessary Documents: You need to include relevant documents like

1. Proof of employment like an ID card or appointment letter copy
2. Copy of recent salary slip to determine last drawn salary because it will be used in the gratuity calculator formula.
3. Documents like an experience certificate or a service record are required.
4. If you are eligible for an employee death certificate you need to attach it.
5. If you have nominated and beneficiary to receive gratuity in case of death or illness you also need to provide a copy nomination document.

3. Payment Timeline: By law, your employer is obligated to pay the gratuity amount within one month from the date of your employment termination or when you make the claim. If you face any delays or challenges in receiving the gratuity amount then you can reach out to the HR department or labour department of your area to get better assistance.

4. Tax Deduction: For gratuity taxable income in India you need to extempt abortion for tax. Gratuity is taxable income, and TDS (Tax Deducted at Source) may apply depending on the total amount. You can consult your tax professional to get personalised advice to know your specific gratuity amount and any obligation related to tax.

Using a gratuity calculator India

The gratuity calculator is a very handy tool to help simplify the process of determining the accurate amount you can receive as a gratuity from your employer. Gratuity is a lump sum payment of a token of appreciation after the service completion. It is offered after service completion of a minimum period which is 5 years or more in the company. You can claim gratuity when you resign or retire after the minimum service period or in other situations like permanent disability and death.

How to use the First Filing gratuity calculator?

Here's a step-by-step guide to using the First Filing Gratuity Calculator (India) to estimate your gratuity amount:

• Access the Calculator: Visit the First Filing website and search for their Gratuity Calculator or navigate to their HR/finance solutions section (if available).
• Input Employment Type: Select whether you are a government or non-government employee. The calculator applies different formulas based on this selection.
• Enter Monthly Salary: Enter your current monthly gross salary, which typically includes your basic pay and Dearness Allowance (DA).
• Years of Service: Enter your total years of service with your current employer. If you haven't completed a full year, include the decimal value (e.g., 3.5 years for 3 years and 6 months).
• Calculate: Click the "Calculate" button. The calculator will process your inputs and display an estimated gratuity amount.

For a more precise estimate consult your HR department. They can confirm the exact formula used by your company and provide an estimate based on your specific situation and company records.

By following these steps and considering the limitations, you can get a reasonable idea of your potential gratuity amount using the First Filing Gratuity Calculator or similar tools in India.

When gratuity is taxable?

It is a common question whether gratuity taxable or not. In India, gratuity is taxable but the exemption limit should be calculated here. Although it is not entirely taxable income, a significant portion comes under section 10(10) of Income Tax 1961 which is taxable. The gratuity taxable amount depends majorly on some factor.

1. If a person is a government employee (either central/state/local authority) then the entire gratuity amount is exempted.
2. If the person is not a Government employee then the gratuity exemption limit is 20 lakh gratuity. For example, if a person is receiving 50 lakh as gratuity after working for 20 years of service and the last monthly salary with DA is 1 lakh then: 1 lakh/month * 15/26 * 20 years = Rs. 11.54 lakhs 11.54 lakh is lower than the maximum limit of 20 lakh so the person will receive an exact amount of 15 lakh because of exemption.

According to the income tax law on, gratuity amount calculation, you should pay taxes and take money from employers.

Benefits of Gratuity:

Gratuity offers several significant benefits for employees in India, providing financial security and support during key life transitions. Here are some of the key advantages:

Lump Sum Payment: Gratuity is a one-time lump sum amount, offering employees a substantial financial boost upon retirement, resignation (after meeting the minimum service period), death, or permanent disability. This financial cushion can be very helpful in managing expenses and making important decisions during these life changes.

Financial Security: The lump sum from the gratuity amount can provide a sense of financial security, particularly for those transitioning to retirement. It can supplement their retirement income, helping them maintain their standard of living or cover unexpected costs.

Meeting Life Goals: The gratuity amount can be used to fulfil various personal and financial goals. For instance, employees can utilise it for their children's education, a down payment on a house, funding a dream vacation, or investing for the future.

Reward for Long Service: Gratuity serves as a valuable recognition of an employee's loyalty and dedication to their employer over a sustained period. It's a financial reward for their contributions to the company's success.

Motivation for Employees: The prospect of receiving gratuity can motivate employees to stay with a company for the long term, fostering loyalty and commitment. It incentivizes them to contribute their skills and experience for a longer period.

Confusing terms with Gratuity

Gratuity and pension: The gratuity is a one-time payment while the pension is a regular payment. Pension is eligible after retirement.

Gratuity and provident fund: A gratuity is a one-time how lump sum while a provident fund is an accumulating savings account where both employee and employer contribute while in gratuity employer contributes.

Gratuity and PF difference: The provident fund is a savings account founded by an employee and employer which can be withdrawn in the working year or upon requirement while gratuity requires resignation, retirement from the company or some certain condition to attain the lump sum amount.

Gratuity and leave encashment exemption: Gratuity is a long-term service award or a financial cushion for life transition while leave encashment exemption is tax relief from unused leave benefits.

Gratuity vs Annuity: Gratuity is a one-time payment, not a continuous income stream while annuity regular payment over time for financial security after retirement.