Gratuity being an important retirement benefit to employees in the Indian context, is relevant for all organizations (i.e. MNC's, Schools and Other business entities) having more than 10 employees . Since an employee sacrifices prime time of his life for the development, prosperity and betterment of his employer, employer pays his employee gratuity as a graciousness or gift to him, when he no longer serves him.
Gratuity Benefit falls in the category of “Defined Benefits” & amount of Gratuity payable to an employee on his exit from service, according to “ Payment of Gratuity Act 1972”, in force at present, is :-
(Salary of the employee at the time of exit) x (15/26) x (Number of Years of Service at the time of exit)
This is subject to a ceiling limit of 20,00,000/-.
Gratuity is payable to an employee on exit from service after he has rendered continuous service for not less than five years:
(a) On his superannuation
(b) On his resignation
(c) On his death or disablement due to employment injury or disease.
In case of (c) vesting condition of 5 years does not apply.
Gratuity Benefits depends upon last drawn monthly wages and is linked to length of service, normally it goes on increasing from the time when the employee joins service and the time of his exit from service due to annual increase in salary and increasing service period.
Let us take example of employee and understand the Impact of "Annual Increase in Salary and Increasing Service Period" on Gratuity Benefits payable to him on his date of retirement. The particulars of employee are as under :-
Name of Employee........................................ Mr. Bhanu Pratap
Date of Birth.................................................. 31.03.1984
Date of Joining............................................... 31.03.2008
Basic Salary on 31.03.2017........................... 5200/-
Retirement Age.............................................. 60 Years
Annual Salary Increase.................................. 8% p.a.
Calculation of Gratuity Payable on 31.03.2017
Age on 31.03.2017............................................... 33
Completed years of Service.................................. 10
Remaining Service Period upto Retirement........ 27
Gratuity Factor....................................................... 15/26
Ceiling Limit on Gratuity...................................... 10,00,000/-
Gratuity Payable = (15/26) x No of Completed years of Service Upto 31.03.2017 x Basic Salary
= (15/26) x 10 x 5200
=30,000/-
Gratuity Benefit falls in the category of “Defined Benefits” & amount of Gratuity payable to an employee on his exit from service, according to “ Payment of Gratuity Act 1972”, in force at present, is :-
(Salary of the employee at the time of exit) x (15/26) x (Number of Years of Service at the time of exit)
This is subject to a ceiling limit of 20,00,000/-.
Gratuity is payable to an employee on exit from service after he has rendered continuous service for not less than five years:
(a) On his superannuation
(b) On his resignation
(c) On his death or disablement due to employment injury or disease.
In case of (c) vesting condition of 5 years does not apply.
Gratuity Benefits depends upon last drawn monthly wages and is linked to length of service, normally it goes on increasing from the time when the employee joins service and the time of his exit from service due to annual increase in salary and increasing service period.
Let us take example of employee and understand the Impact of "Annual Increase in Salary and Increasing Service Period" on Gratuity Benefits payable to him on his date of retirement. The particulars of employee are as under :-
Name of Employee........................................ Mr. Bhanu Pratap
Date of Birth.................................................. 31.03.1984
Date of Joining............................................... 31.03.2008
Basic Salary on 31.03.2017........................... 5200/-
Retirement Age.............................................. 60 Years
Annual Salary Increase.................................. 8% p.a.
Calculation of Gratuity Payable on 31.03.2017
Age on 31.03.2017............................................... 33
Completed years of Service.................................. 10
Remaining Service Period upto Retirement........ 27
Gratuity Factor....................................................... 15/26
Ceiling Limit on Gratuity...................................... 10,00,000/-
Gratuity Payable = (15/26) x No of Completed years of Service Upto 31.03.2017 x Basic Salary
= (15/26) x 10 x 5200
=30,000/-
Table showing the Impact of Annual Increase in Salary and Increasing Service Period on Gratuity Payable to Mr. Bhanu Pratap on 31.03.2017 & on his retirement.
| |||||
Year
|
Gratuity Payable Date
|
Expected Basic Salary increased by 8% p.a.
|
Expected Service Period
|
Gratuity Factor
|
Expected Gratuity Payable
|
0
|
31.03.2017
|
5200
|
10
|
15/26
|
30000
|
1
|
31.03.2018
|
5616
|
11
|
15/26
|
35640
|
2
|
31.03.2019
|
6065
|
12
|
15/26
|
41990
|
3
|
31.03.2020
|
6551
|
13
|
15/26
|
49129
|
4
|
31.03.2021
|
7075
|
14
|
15/26
|
57141
|
5
|
31.03.2022
|
7641
|
15
|
15/26
|
66120
|
6
|
31.03.2023
|
8252
|
16
|
15/26
|
76170
|
7
|
31.03.2024
|
8912
|
17
|
15/26
|
87405
|
8
|
31.03.2025
|
9625
|
18
|
15/26
|
99950
|
9
|
31.03.2026
|
10395
|
19
|
15/26
|
113943
|
10
|
31.03.2027
|
11226
|
20
|
15/26
|
129535
|
11
|
31.03.2028
|
12125
|
21
|
15/26
|
146893
|
12
|
31.03.2029
|
13094
|
22
|
15/26
|
166199
|
13
|
31.03.2030
|
14142
|
23
|
15/26
|
187654
|
14
|
31.03.2031
|
15273
|
24
|
15/26
|
211478
|
15
|
31.03.2032
|
16495
|
25
|
15/26
|
237913
|
16
|
31.03.2033
|
17815
|
26
|
15/26
|
267224
|
17
|
31.03.2034
|
19240
|
27
|
15/26
|
299701
|
18
|
31.03.2035
|
20779
|
28
|
15/26
|
335666
|
19
|
31.03.2036
|
22442
|
29
|
15/26
|
375466
|
20
|
31.03.2037
|
24237
|
30
|
15/26
|
419486
|
21
|
31.03.2038
|
26176
|
31
|
15/26
|
468147
|
22
|
31.03.2039
|
28270
|
32
|
15/26
|
521908
|
23
|
31.03.2040
|
30532
|
33
|
15/26
|
581275
|
24
|
31.03.2041
|
32974
|
34
|
15/26
|
646800
|
25
|
31.03.2042
|
35612
|
35
|
15/26
|
719090
|
26
|
31.03.2043
|
38461
|
36
|
15/26
|
798806
|
27
|
31.03.2044
|
41538
|
37
|
15/26
|
886675
|
From above example it is clear that there is a bearing impact of "Annual Increase in Salary and Increasing Service Period" on Gratuity Payable to employee on 31.03.2017 and on his retirement. If we calculate the impact from the above example, Gratuity payable to Mr. Bhanu Pratap on Retirement @ a increased salary of 8% p.a. compounded with his increased service period up to retirement is 8,86,675/- which is 29.55 times the Gratuity Payable to him on 31.03.2017 (i.e. 30,000/-).
It is also understood from the above working that gratuity benefits payable to employees in future years has a bearing Impact of Annual Increase in Salary and Increasing Service Period, hence it is advisable to MNC's, Schools, Private Universities, Private Companies to start an early Investment by creating a Gratuity Trust either by Self Managed or though Insurance Company to mitigate the effect of "Annual Increase in Salary and Increasing Service Period" on Gratuity Payable to employees in future.
It is also understood from the above working that gratuity benefits payable to employees in future years has a bearing Impact of Annual Increase in Salary and Increasing Service Period, hence it is advisable to MNC's, Schools, Private Universities, Private Companies to start an early Investment by creating a Gratuity Trust either by Self Managed or though Insurance Company to mitigate the effect of "Annual Increase in Salary and Increasing Service Period" on Gratuity Payable to employees in future.
If you wish to avail our consultancy services to create a Gratuity Trust Fund, you may call us at 9211637063 for your query.
Tikaram Chaudhary
Group Gratuity Trust Fund Consultant
Email ID - tikaramchaudhary@gmail.com
Mobile Number - 9211637063
Linkedin Profile - https://www.linkedin.com/in/tikaram-chaudhary-a5727848/
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