Introduction:

The concept of gratuity in India has prevailed for a long time. This statutory benefit is offered as gratitude by employers to their staff members for their loyalty and diligent service over the years. It is a form of monetary benefit, provided voluntarily by the employer to the employee at the time of retirement, resignation, or superannuation, subject to the fulfillment of certain conditions. For many working professionals, understanding how to calculate gratuity in India can be crucial to maximizing their retirement benefits. However, the calculation can seem quite complex.

Understanding Gratuity:

Gratuity is governed by the Payment of Gratuity Act, 1972. According to the law, any employee who has worked with an organization for five years or more is eligible for gratuity. The Act applies to establishments employing ten or more workers on any day during the preceding twelve months.

Gratuity Calculation Formula:

If you are wondering how to calculate gratuity in India, the formula is straightforward. Here, the Last Drawn Salary includes basic salary and dearness allowance. The number of years of service is rounded off to the nearest full year. This calculation ensures that employees receive a fair amount based on their length of service and salary at the time of retirement or resignation.

The formula to calculate gratuity is:

Gratuity = [(Basic salary + Dearness allowance) x 15/26] x Number of years of service

Where,

- The basic salary and dearness allowance (if any) are considered for the calculation.

- The ratio 15/26 represents 15 days' salary out of 26 working days in a month.

- The number of years of service is rounded off to the nearest full year.

For example, if an employee has a basic salary of ₹50,000, no dearness allowance, and has served for ten years, the gratuity will be calculated as follows:

[(₹50,000 + 0) x 15/26] x 10 = ₹2,88,461.54

Tax Implications:

As per the current tax laws in India, the maximum tax exemption for gratuity is ₹20 lakh. Beyond this amount, it is subject to tax. However, in Budget 2019, it was proposed that the maximum limit for tax exemption on gratuity be increased to ₹30 lakh.

Investing Gratuity in Fixed Deposits:

While gratuity helps one finance their post-retirement life, investing the sum received strategically can yield better returns. One popular choice is fixed deposits (FD). Let's consider an FD rate of 6% annually, on an investment amount of ₹50 lakh.

Fixed deposit interest = Principal x Rate x Time

The 50 lakh FD interest per month will be:

₹50,00,000 x (6/100) x (1/12) = ₹ 25,000

Disclaimer:

With regard to trading in the financial market, every investor must conduct due diligence and thoroughly evaluate the pros and cons. The market is subject to risks, and there can be no guarantee of returns on investments. Always consult a certified financial advisor for informed decision-making.

Conclusion:

Understanding how to calculate gratuity in India is a key aspect in financial planning for anyone looking towards a secure retired life. By learning the ropes of gratuity calculation and keeping a vigilant eye on the clauses of the Gratuity Act, both employers and employees can ensure they fulfill their statutory obligations and rights respectively.

Summary:

Gratuity in India is a statutory benefit offered to eligible employees with over five years of tenure. The calculation involves a complex formula incorporating the basic salary plus dearness allowance, multiplied by 15/26, and further multiplied by the number of years of employment. The maximum gratuity amount that can be tax-exempt is ₹20 lakh. This was proposed to be increased to ₹30 lakh in Budget 2019. Additionally, investing gratuity in instruments like FDs can yield monthly interests, for example, a ₹50 lakh FD at an annual rate of 6% can fetch ₹25,000 per month. However, it's important for each investor to evaluate the pros and cons before putting any money in the financial market.