How is the Payment of Gratuity Act 1972 Calculated
On 21 August 1972, a bill was passed in the Indian parliament for the regulations of wages. This bill “payment of gratuity” was passed keeping in mind, loyal employees who had been rendering services to the same employer for a longer period of time. The main principle behind passing the bill was to monetarily help employees who are retiring or are about to retire. In the bill, the government has specified rules regulations and the procedure the employers need to follow to calculate gratuity. One can use a simple Gratuity Calculator to know the lump sum they will be receiving at the time of retirement.
An employee is entitled to receive gratuity benefit under two conditions
- The organisation or the company he has been working with must have at least ten people on the payroll in any year. Once the company has crossed the mark it does not matter if the number of employees then reduce.
- The employee must have worked with the company for at least five years. However, this rule can be relaxed, if the employee meets with an accident that may lead to death or disablement.
Calculation of gratuity
As per the bill, an employee who has worked with the company for more than five years can claim for this benefit. The employee can claim for gratuity at the time of retirement, termination or resignation or in the case of an accident that leads to death or disablement of the employee
There is no stipulated percentage in the bill that specifies the amount an employee can get as gratuity benefit. And hence a formula-based method was introduced to calculate the amount of gratuity.
The formula to calculate gratuity is
Gratuity = 15/26 (Last drawn salary*no of years of service)
Here, the gratuity is calculated as the equivalent of half month salary, where a number of working days in the month are 26. Last drawn salary and no. of years of service are two dependent variables. Earlier the maximum amount if gratuity paid to the employee was 10 Lakhs which was then revised in March 2018 and made to 20 Lakhs. So, the employer may offer 20 Lakhs or the amount that is calculated as per the formula, whichever is lower. It is important to note here that the upper limit for payable gratuity also depends upon the rules of the company.
Rules of payment of gratuity
- In case of death or disablement of the employee irrespective of the period an employee has served the company, the employer must pay him a basic gratuity. This gratuity can also be claimed by a nominee or heir.
- The employer may ask for valid proofs of nominee or heir, to assure the authenticity
- In case of death of an employee, where the nominee is a minor, the assistant labour commissioner can invest the money in a term deposit under the name of the nominee with any nationalised bank, until the nominee becomes a major.
- The rules also state that employee should claim for the benefit within the 30 days of eligibility.
- The employer may receive the claim for benefit in case the applicant provides a specific and valid reason.
- Once the application is received the employer must provide a specific date and amount of gratuity within 15 days of application.
- The employer may reject the claim application with valid reasons.
- Payment of gratuity can be done in cash. Demand draft or by cheque
In the case of following disputes, the applicant (employee or nominee or heir) can file a complaint to controlling authority, i.e. assistant labour commissioner
- If the employer rejects the application for a claim without specific and valid reasons
- Amount of gratuity paid is less than what the employee thinks should be paid.
- If the employer fails to specify the date and amount after receiving the application or fails to pay the gratuity to the employee within the specified time.
Just like the FD interest calculator, there is a number of Gratuity Calculators available on the internet. An employee can use the calculator to calculate the amount he can receive as gratuity. While gratuity is a benefit that government offers to the employee, it is one’s own responsibility to carefully plan their financial strategies and invest the money in various schemes like FD, TD or PPF so that they are financially secure, while they earn more in the form of FD interest rates 2019. Bajaj Finance is one of the most reputed companies that offer a higher rate of interest as well as flexible tenors to their customers.