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Gratuity Calculator

Tax and salary calculators

What is Gratuity?

Gratuity is an amount that an employer is obligated to pay to an employee upon completion of at least five years of service. Being introduced as law in 1972 under The Payment of Gratuity Act, this financial payment can be considered as an additional retirement benefit.

In India, a Gratuity is taxable if the amount is more than ₹2,000,000. With that said, not all employees are eligible for this gratuity payment. In order to qualify, the following requirements must be met:

  • The individual should be eligible for superannuation, which is the retirement benefit offered to the working class.

  • The individual is retiring from the job.

  • The individual has worked for at least five full years for the same employer.

In addition to the above, an individual is also eligible for gratuity in the unfortunate event of death or disablement due to an accident or disease.

How to use a Gratuity Calculator?

Once you determine your eligibility for gratuity, you can proceed to calculate the monetary amount you may receive. To do this, the following calculation is used:

Gratuity = Number of years at work × (Last month's salary + D.A.) × 15/26

Where:D.A. stands for Dearness Allowance, which is an extra compensation paid to cover inflation. This allowance is notably paid to government employees and pensioners in India, Bangladesh, and Pakistan. It allows these individuals to cope with growing prices more easily. The D.A. calculation is made based on AICPI - The All India Consumer Price Index.

It's crucial to note that the number of years has to be rounded to full years in this calculation. So, if an individual has been working for seven years and three months, the inserted value should be seven years.

An Actual Example to Demonstrate the Significance of Gratuity Calculator

Let's consider an example to better understand the usage of the gratuity calculation. Assume an individual has been working for 12 years and seven months, and it's time for them to retire. The last month's salary for this individual, including the dearness allowance, sums up to ₹4,000.

Using the mentioned calculation, the individual's eligibility will round up to 13 years. Therefore, the equation would be as follows:

Gratuity = Number of years at work × (Last month's salary + D.A.) × 15/26

This calculation enables the employee to know the amount they will receive at the end of their service, hence enabling them to plan for their retirement more strategically.

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