What Is A Gratuity Fund And How Gratuity Calculator Plays An Important Role?

Gratuity is an amount that is paid to the employee for his services rendered to an organization for five or more years. The payment of gratuity came into existence after the Payment of Gratuity Act 1972, which states that an employer has to pay gratuity as a form of gratitude for the services rendered by an employee for five or more than five years.As per the act the gratuity amount is to paid in three scenarios: a) in case of retirement or resignation, b) on his/her superannuation, c) on death or disablement due to accident or disease , with such terms and conditions it is important to have the details of the correct amount to be credited according to the law as errors might cause hefty penalties. It includes categorization for calculating gratuity as per law. One of the categories is the employer who comes under the category of The payment of Gratuity Act 1972.

The main importance of gratuity is that it helps the employee to plan his/her future.

Gratuity amount. There are certain limited tabs which are exempted of tax as well. As per the law the amount of gratuity which  does not exceed the amount of 20 lakhs is exempted from tax as per the section 10(10) of the Income Tax Act. There are provisions with extra benefits introduced by different platforms for better profits to invest gratuity funds. Gratuity funds are applicable to sectors like ports , mines, railways, shops, enterprises or institutions with more than 10 employees and have functioned for more than 12 months.

Gratuity calculator comes in the picture as a solution to the complicated calculation, as it is important to maintain accuracy, missing a single digit might cause grave consequences. Gratuity calculator helps one determine the amount that he/she will receive.


There are formulas that can help you determine the gratuity amount :

As per the law there are two categories, a) the one’s covered under the ACT, b) one’s that are not covered under the ACT:

a. The one’s covered under the Payment of Gratuity Act 1972

Two parameters for calculating Gratuity- number of years served, amount of the last salary drawn

Gratuity =  amount withdrawn as last salary x (15/26) x number of working days,

26 being the number of days in a month as per the law and 15, as the rate of calculation of gratuity is at 15 days wage rate.

Also Read: Gratuity Act, Amendment, Eligibility, Abstract, and Benefits

b. The one’s not covered under the Payment of Gratuity Act 1972 

This category works for the private sector companies that is not covered under the gratuity act of 1972

Gratuity amount + amount withdrawn as last salary x (15/30) x number of days served

Here, the number of days in a month is 30 as benefits of lower denomination are considered and paid.

These are two ways gratuity can be calculated as it is an important part for an employee plan for his/ her future. But there are certain factors which affect the gratuity funds, some the factors are:

  • The past history of the years the employee has served the organization.
  • The next fact that comes in the picture is the gratuity benefits changes as per the increment of the employees’ salary.
  • The amount might vary as per the changing formulas along with the amendments made by the government to the Payment of  Gratuity Act.
  • A small change in the eligibility criteria might as well change the whole calculation of the gratuity fund for the employee.

Companies have various options to benefit from the gratuity fund as well. One of them is the funding option. There are companies that set up gratuity funds. The investment is managed either by the investment of the company or is managed by an insurance company which helps them receive tax benefits under various circumstances.

Amit Kumar

Amit Kumar is an experienced tech enthusiast, digital marketer and blogger who is well known for his ability to predict market trends. Check out his blog at Digital Drona