Gratuity is a mandatory retirement payment paid to you once you complete a minimum five years of service or looking forward to your retirement. Planning for post-retirement finances can be easier if you are aware of how much gratuity money you will receive. Instead of waiting for the human resources personnel to inform you, you can easily utilize a gratuity calculator to estimate the amount of money you will receive. There are different criteria for gratuity calculation. We will look at various formulae that will help you estimate your gratuity amount so that you can plan your investments better upon receiving the money.
Calculation of Gratuity
You can use various Online Gratuity Calculators in India to determine the gratuity lump sum you will receive. According to the Payment of Gratuity Act, 1972, the total amount of gratuity is restricted to Rs. 20 lakhs per employee. The government portal for gratuity displays the following formula –
Gratuity amount + (1/4)*(Basic Salary + Dearness Allowance) * No. of 6 monthly periods completed. In essence, it is 16 times the basic pay.
Keep in mind that there are two categories of employees and you have to ensure you are doing the right calculation as per the below criteria –
- Category 1: Employees who fall under the Act
- Category 2: Employees who do not fall under the Act
Both categories cover private and government employees. For government employees, there are more income heads. The calculation accounts for Dearness Allowance which is specific to their pay structure. All organizations with at least 10 employees working on a single day for the preceding 12 months are required to receive gratuity payment.
Category 1: Employees who fall under the Act
Using the two important criteria – number of years of service and last salary drawn, one can use the following formula –
Gratuity = Previous salary before leaving x (15/26) x Total No of years working
Last Drawn Salary is an essential component to account for the following components –
- Dearness Allowance – applicable only for government employees
- Incentives on sales
Example: If you had been drawing Rs. 80,000 as your last basic salary with 10 years 4 months of tenor, then gratuity amount per the formula is:
Gratuity = Rs. 80,000 x (15/26) x 10 = Rs. 4.62 lakhs
The 4 months is below 5, so is rounded off to 10. Months more than 5 are rounded off to the next year.
Category 2: Employees who do not fall under the Act
You can be paid a gratuity even if the organization is not covered under the Act and is not mandated. In such a scenario, the calculation of 15 days on 26 days changes to 30 days. The base becomes higher from 26 to 30 days.
Gratuity = Previous salary before leaving x (15/30) x Total no. of years worked
In the above example, if your organization is not covered under the Act, then the calculation will be as follows –
Gratuity = Rs. 80,000 x (15/30) x 10 = Rs. 4.00 lakhs
Fixed Deposits – An ideal investment for multiplying Gratuity money
Once you receive the gratuity amount, you can invest it in a high-paying company FD, such as Bajaj Finance FD where you can easily earn 8.95% if you are a senior citizen. Use the online FD calculator to see the maturity amount and you can tweak the tenor to avail the best returns possible. You can go for a special tenor of 15 months or create different FDs with lump sum payments to ensure a continuous stream of returns. These FDs are highly liquid. Therefore, it is easy to liquidate them when you are in need of urgent cash. Alternatively, you can even raise a loan against FD.
These deposits are highly stable as they are certified with CRISIL and ICRA ratings. Hence, you can be assured of high returns on your hard-earned gratuity money with Bajaj Finance FD.