Gratuity entails an employee being offered some financial advantage by an employer as a reward to the employee in appreciation of his or her services. It is very essential in post-employment benefits and is regulated by the Payment of Gratuity Act, 1972 in India. Considering the fact that most individuals have several employers throughout their career, it is crucial to know how to calculate gratuity on several employers. This paper asserts how one can calculate gratuity when the employment could cut across different organizations.
Although the gratuity calculation formula does not depend on the number of employers, the aspects of continuous service and partial periods of working with other companies might complicate the calculations in some way. The process can be explained as shown below.
Major Conditions of calculating Gratuity.
In India, the eligibility of gratuity is regulated by Payment of Gratuity Act, 1972. The following are the criteria of eligibility of gratuities:
The employee is required to have contributed not less than five uninterrupted years of service to an organization.
Gratuity is applicable to:
Firms that employ 10 or above employees.
Full-time workers that have been categorized as permanent employees.
The value of the gratuity is determined according to the previous salary of the employee and the service.
Gratuity Calculation Formula.
The equation to determine gratuity is easy and is as follows:
Gratuity =(Last Drawn Salary) (15/26) (Years of Service)
Where:
Last Drawn Salary = Basic Salary + Dearness Allowance (DA)
The daily rate of 15/26 is an indicator of the number of days wages earned per year of service (26 working days per month) taken.
Year of service is rounded to the nearest year.
Note
In the case of employees whose service was not included in the payment of gratuity act, the calculation of years does not involve rounding off of incomplete service years.
Procedures in determining the multiplier gratuity of different employers.
In computing gratuity to several employers, you will be required to compute gratuity to each and every employer separately because in each organization, gratuity is computed according to tenure and salary of an employee.
Here’s how it’s done:
Step 1: involves calculating the service period per employer.
 Record down the exact service period of each employer that you worked in.
Step 2: Calculate the Gratuity Formula per each Employer.
 Divide the gratuity amount per employer using your previous drawn salary and the years you had served in that particular employer.
Step 3: Add Up the Gratuity of all Employers.
 Sum up the amounts of gratuity received with each employer to obtain the cumulative amount of gratuity.
Upon consideration, it is important to remember the following points.
1. Continuous Service
In case of continuous service to the same employer, the gratuity is calculated. Where employment is interrupted between jobs, the statistics of service with the various employers are computed independently.
2. Tax Implications
Gratuity that is received by an employee in government is tax free. In the case of people who work in the private sector, the exemption of gratuity is up to 20 lakh in a lifetime. Anything that is above this limit is taxed.
3. Ceiling Limit under the Act
According to the Payment of Gratuity Act, the highest amount of gratuity is 20 lakh which must be given to the employees in the private sector. In the case of employees who cannot be covered by the Act, there is no statutory ceiling.
4. Special Cases
The right to receive gratuity can be revoked to the employees who are dismissed due to misbehavior, poor performance or fraud, regardless of their qualifications to be served the tenure.
Typical Situ in Multiple Employer Gratuity.
1. Workers Changing Employment Often.
In case an employee has more than one employer but less than five years with each employer, such an employee is not eligible to receive a gratuity payout.
Case Study: Sita had served three years with three companies A, B, and C. None of these employers will be willing to give her gratuity because of the five-year eligibility criterion that she has not fulfilled.
2. Replacement of Jobs After Prolonged Tenure.
Where there are more than five years of tenure with other employers, the gratuity will be computed separately on each of the tenures.
Scenario: Mohan had worked 6 years with Employer X and 7 years with Employer Y. He can get gratuity with both employers.
3. Intra-Company Transfer.
In case an employee moves between companies within the same group, an employer can treat such moves as a continuity of service under corporate policies.
Gratuity on Employees Not falling under the payment of Gratuity Act.
In the case of non-covered employees to the Payment of Gratuity Act, the calculation formula of gratuity will be slightly different:
Gratuity =(Last drawn salary x number of years of service x 15)/30.
Example
Assuming that Ravi was employed by a private company (not subject to the Act), had a basic remuneration of 50,000 and served 6 years:
Gratuity = (₹50,000 × 6 × 15) / 30 = ₹1,50,000
Disclaimer
The data presented in this article is purely of general awareness. Computations of gratuity rely on certain employment pacts, company initiatives, and laws that are in force in India. Although every attempt is taken to verify the accuracy of the information, we advise that you should visit a certified financial advisor or the HR department of your employer to verify such information. Since gratuity carries monetary implications, one should consider the benefits and costs of changes of employment, and how they impact on your general financial planning process.
Summary:
Another important financial benefit on post-retirement is known as gratuity, which is regulated by the Payment of Gratuity Act, 1972. Calcalculation of gratuity: In the case of multi-organizational workers, one would have to add the amount of gratuity due to individual tenure with each employer.
In order to determine gratuity, the following formula is applied:
 Gratuity =(Last Drawn Salary 15/26x Years of Service)
In the case of various employments, gratuity and service period are to be computed individually with each employer, subject to the five-year eligibility requirement. Lastly, add up the amount of gratuity to calculate the amount of benefit.
As an example, say Ravi has spent 6 years at Company A (earning 30,000/month) and 8 years at Company B (earning 45,000/month), then he would compute gratuity in each case separately by using the formula. The combined amount of the two companies would be used as final gratuity.
Note, the government employees are tax-exempt on gratuity, and the tax-free limit of the government is ₹20 lakh to the employees of the private sector. Less than five years of service or dismissal based on poor conduct are generally not given gratuity. Every employee must be informed of the legal limits and seek the counsel of financial experts in assessing his/her retirement packages.
