Gratuity is a significant financial benefit provided to employees as a token of appreciation for their long-term service. Governed by the Payment of Gratuity Act, 1972, this one-time payment serves as a financial cushion upon retirement or resignation. Understanding how gratuity is calculated and its impact on financial planning can help employees make informed decisions about their future.
Who is Eligible for Gratuity?
Employees become eligible for gratuity under the following conditions:
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Completion of five or more years of continuous service in an organization.
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Retirement, resignation, or termination (except in cases of misconduct).
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In case of death or disability, gratuity is paid to the nominee without the five-year requirement.
How is Gratuity Calculated?
Gratuity is calculated based on a simple formula:
Gratuity =Last Drawn Salary* Years of Experience* 1526/26
Where:
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Last Drawn Salary = Basic Salary + Dearness Allowance (if applicable).
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Years of Service = The total number of years worked (a period of six months or more is rounded up).
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15/26 = Represents 15 days of salary for every completed year of service.
For example, if an employee’s last drawn salary is ₹50,000 and they have worked for 10 years:
50000 *10 *15/26 = ₹2,88,462
Tax Implications on Gratuity
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For government employees, gratuity is fully tax-exempt.
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For private-sector employees, gratuity is tax-free up to ₹20 lakh (as per current tax laws). Any amount exceeding this limit is taxable as per the employee’s income tax slab.
Why Gratuity Matters in Financial Planning?
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Acts as a retirement fund for long-term financial security.
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Helps employees with post-retirement expenses or unforeseen financial needs.
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Encourages employee retention, benefiting both the employer and the workforce.
Conclusion
Gratuity is an essential component of employee benefits, offering financial security for long-serving employees. Understanding its calculation, eligibility, and tax implications can help individuals plan their finances efficiently. To estimate your gratuity amount, use this Gratuity Calculator for a quick and accurate calculation.
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