Gratuity is the financial reward received by an employee from their employer. It is a token of appreciation for a departing employee. Gratuity payments provide workers with retirement investment advantages. For an employee to be eligible for a gratuity, he or she must have worked for the firm for at least five years. A gratuity calculator assists in determining the amount of gratuity a recipient will get.

Gratuity Calculator

A gratuity calculator is a tool used to predict the amount of gratuity one would get when leaving a job. It is a useful resource for workers who intend to retire. The gratuity calculator is based on a formula that incorporates many inputs. Included are the most recent monthly pay received, the number of years of employment (including months), and the dearness allowance. 

Retirement Investment

The lump-sum gratuity payment may be deposited in the following savings and investment plans.

Senior Citizens Savings Schemes (SCSS):

The Senior Citizens Savings Schemes are risk-free programs for retirement investment.

One of the post office’s savings plans. Under Section 80C of the Income Tax Act, investments up to INR 1.5 lakh are eligible for tax exemption. Investing in SCSS plans might provide tax benefits.

Cash Deposits:

For decades, Indians’ greatest savings choice has been fixed deposits. Current FD interest rates range between 5.5% and 7.5%. In addition, investors may utilize any of the available online FD calculators to assess returns.

Debt funds:

Money market instruments, corporate bonds, government bonds, and other government securities are some of the assets in which debt mutual funds invest.

Capital gains tax

The capital gains tax on debt funds is dependent on the holding duration of the investment. Debt funds held for less than three years are subject to short-term capital gains tax, which is applied to the investor’s taxable income. Long-term capital gains tax applies to assets held for more than three years. Moreover, these profits are subject to a 20% tax rate with indexation advantages.

How to Compute Gratuities

Using the formula for the gratuity calculator, one may calculate the gratuity amount.

Gratuity (G) = n*b*15/26.

n = The number of years spent at the present company.

b = the most-recently-paid basic monthly wage (plus dearness allowance and the commission received on sales, if any).

Note:

Gratuity is based on a total of 26 working days each month.

Gratuity is calculated at the rate of 15 days’ salary.

Now, let’s examine how to compute gratuities for the two previously stated groups.

Income Tax and Gratuity Exemptions

Gratuities received by an employee are taxed under the “Income from Wages” category. The Department of the Internal Revenue Service has designated gratuities tax-exempt up to a specified threshold under the Income Tax Act. Different rules apply to government workers, non-government employees covered by the Act, and non-government employees not protected by the Act.

Government personnel is free from paying tax on their whole gratuity.

gratuity calculatorThe highest tax exemption for non-government workers covered by the Act is the lowest of the following:

15/26* Last drew pay x completed a year of service or a part of a year of service for more than six months INR 20,00,000 is the maximum gratuity amount.

Allowance received

The greatest tax exemption for non-government workers not covered by the Act is the lowest of the following:

The maximum gratuity is equal to half a month’s average wage multiplied by the number of years of service completed, which equals INR 10,000,000. Allowance received

Conclusion

One of the post-retirements defined-benefit programs is gratuity. It is awarded to an employee by his or her employer in recognition of the employee’s continued service. It is one of the retirement benefits provided by the company to the departing employee. An employee may quit his employment for many reasons, as well as retirement, for a safer position elsewhere, voluntary retirement, death or disability, or other unpleasant circumstances. The calculator provides the amount of gratuity in a matter of seconds, and it is simple to use. It is entirely free to use on several occasions. In addition, the calculator assists with retirement planning for a stress-free retirement investment.

Both commuted and uncommuted pensions are two categories that may be used to describe the sort of pension that a person receives when they reach retirement age. The first option is paid in one lump sum and does not come in instalments, whilst the second option is paid out over some time.