Gratuity is a lump sum amount that an employer pays to an employee as a gesture of gratitude for the services rendered by the employee to the company. Gratuity is a statutory right of an employee who has completed at least five years of continuous service with the same employer. Gratuity is governed by the Payment of Gratuity Act, 1972, which covers both private and public sector employees.
Gratuity is a valuable source of income for an employee who is retiring or leaving the job. It can help the employee to meet his or her financial goals, such as buying a house, funding children’s education, or planning a vacation. A gratuity is also a tax-efficient form of income, as it is exempt from tax up to a certain limit under Section 10(10) of the Income Tax Act, 1961.
However, calculating the gratuity amount and the tax savings can be a complex and tedious task, especially if you have worked in different organizations or have received variable salary components. That is why you need a gratuity calculator, an online tool that helps you estimate your gratuity amount and tax savings based on your salary and service details.
In this blog post, we will show you how to use a gratuity calculator to calculate your gratuity and tax savings online. We will also explain the gratuity formula, the eligibility criteria, and the tax implications of gratuity.
What is a Gratuity Calculator?
A gratuity calculator is an online tool that helps you calculate your gratuity amount and tax savings based on your salary and service details. You just need to enter the following inputs in the gratuity calculator:
- Your last drawn basic salary plus dearness allowance (DA).
- Your number of years of service completed with the current employer.
The gratuity calculator will then show your gratuity amount as per the Payment of Gratuity Act, 1972.
You can use the gratuity calculator to compare different scenarios, such as changing your salary, and years of services, to see how they affect your gratuity and tax savings. You can also use the gratuity calculator to plan your retirement or resignation and optimize your financial outcomes.
Also Read: How to Use a Salary Calculator to Optimize Your Tax Savings and Achieve Your Financial Goals
How to Use a Gratuity Calculator?
Using a gratuity calculator is very easy and convenient. You just need to follow these simple steps:
- Visit the Suvit gratuity calculator website.
- Enter your last drawn basic salary plus DA.
- Enter your number of years of service completed with the current employer.
- Click on the calculate button and get your gratuity amount and tax savings instantly.
- You can also change the input values and see how the output values change accordingly.
How to Save Tax on Gratuity?
The gratuity amount is exempt from tax up to a certain limit under Section 10(10) of the Income Tax Act, 1961. The tax-exempt limit depends on the category of the employee and the source of the gratuity.
There are three categories of employees for gratuity taxation:
- Government employees
- Employees covered under the Payment of Gratuity Act, 1972
- Employees not covered under the Payment of Gratuity Act, 1972
The tax-exempt limit for each category is as follows:
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Government employees: The entire gratuity amount received by a government employee is exempt from tax, irrespective of the source of the gratuity.
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Employees covered under the Payment of Gratuity Act, 1972: The gratuity amount received by an employee who is covered under the Act is exempt from tax up to the least of the following:
- Rs. 20 lakh.
- 15 days’ salary (based on the last drawn salary plus DA) for each completed year of service or part thereof.
- The actual gratuity amount received.
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Employees not covered under the Payment of Gratuity Act, 1972: The gratuity amount received by an employee who is not covered under the Act is exempt from tax up to the least of the following:
- Rs. 10 lakh.
- Half a month’s salary (based on the average salary plus DA of the last 10 months) for each completed year of service.
- The actual gratuity amount received.
For example, if you are an employee covered under the Act, and you have received a gratuity amount of Rs. 5 lakh as per the Act, and Rs. 10 lakh as per your employer’s policy, then your tax-exempt gratuity amount will be:
The least of the following:
- Rs. 20 lakh.
- 15 days’ salary (based on the last drawn salary plus DA) for each completed year of service or part thereof.
- The actual gratuity amount received.
Assuming your last drawn salary plus DA was Rs. 50,000, and your number of years of service was 11, then your tax-exempt gratuity amount will be:
The least of the following:
- Rs. 20 lakh.
- 155000011/26 = Rs. 3,16,346
- Rs. 10 lakh (the higher of Rs. 5 lakh and Rs. 10 lakh).
Therefore, your tax-exempt gratuity amount will be Rs. 3,16,346, and your taxable gratuity amount will be Rs. 10 lakh - Rs. 3,16,346 = Rs. 6,83,654.
You can save tax on your taxable gratuity amount by investing it in tax-saving instruments, such as ELSS, PPF, NPS, etc.
Also Read: How an FD Calculator Can Help You Plan Your Savings and Secure Your Future
FAQs
Q: What is the minimum service tenure required to qualify for gratuity after resigning from a job?
A: To be eligible for gratuity, you typically need to complete at least five years of continuous service. However, there are exceptions where gratuity may be paid before five years in cases of death or disablement due to illness or accident.
Q: Is there a cap on the maximum amount of gratuity one can receive?
A: Yes, there is a limit on the gratuity amount set at Rs 20 lakh, regardless of the duration of your service with the company.
Q: If my employer faces bankruptcy, will I still receive my gratuity?
A: Even in the event of your employer declaring bankruptcy, you are entitled to receive your gratuity amount. It is protected and cannot be withheld by any court order.
