Gratuity is a sum of money that an employer pays to an employee in return of the services rendered by him to the company. Such payment is done on instances such as retirement, termination, layoff, or resignation of the employee. However, he or she will be entitled to receive gratuity only after being engaged with the company for a minimum span of 5 years at a stretch.
The calculation of gratuity amount of an employee is done as mentioned in the Payment of Gratuity Act of 1972. It covers employees working in both private sectors as well as government sector. Any company having at least 10 employees working per day for the last 12 months are legally bound to pay gratuity amount to the eligible employees. The amount is transferred to the bank account of the employee. He/she can find out how much gratuity amount he/she is capable to avail by using a gratuity calculator.
Gratuity calculation is of 2 types –
- For employees covered under the Gratuity Act-
The 2 primary parameters to calculate gratuity amount are –
- Number of years he/she has worked for the company
- Last salary amount drawn by the employee
The formula is –
Gratuity = Last drawn salary x (15/26) x Number of years worked for the company
The number of working days per month is taken as 26 days, and the calculation is done based on 15 days’ wages.
- For employees exempt from the Gratuity Act
An employee is eligible to receive a gratuity sum even if the company he is working for is not covered under the Act. The number of working days in a month is taken as 30 days here, instead of 26. The formula in this case is –
Gratuity = Last drawn salary x (15/30) x Number of years of service
Once you fill in all necessary inputs in the gratuity calculator, it instantly gives you an estimate of your stipulated gratuity amount.
Utilising gratuity amount after retirement
Individuals on the verge of their retirement have to find ways to keep at least one source of income. Utilising savings as investment is one of the best options to earn assured returns. The gratuity amount received by him adds up to his/her savings. The same amount if utilised in form of investment ensures a regular source of income even after retirement.
What investments to opt for?
Fixed deposits are considered one of the best investment tools for senior citizens. It is one of the ideal instruments of investment for a retiree as it ensures security and assured returns on the principal amount. Risk bearing factor in an FD investment is almost zero.
If a soon-to-retire individual is planning on investing the gratuity amount, he/she can make use of the gratuity calculator to check the approximate sum he is entitled to receive. Having done that, he/she can start his investment planning accordingly.
NBFCs such as Bajaj Finserv offer attractive interest rates and other privileges to senior citizens on their fixed deposit returns.
The government also offers programs like Senior Citizen Saving Scheme (SCSS) to enable retirees grow their savings and secure their future.
Senior citizens FD vs Senior Citizen Saving Scheme (SCSS)
Senior Citizen Savings Scheme (SCSS) is a government-sponsored scheme launched in the year 2004. Individuals aged above 60 years can invest their savings under this scheme and avail high interest returns on them. It is one of the most recommend investment schemes for senior citizens.
On the other hand, senior citizens fixed deposits are the fixed deposit schemes custom made by financial institutions for aged individuals and retirees.
Fixed deposits, as compared to the SCSS, are considered a better option of investment for senior citizens as it can be withdrawn at any time. Funds from SCSS can only be withdrawn after the completion of 1 year.
Also, SCSS comes with a rigid tenor of investment. Individuals cannot extend the tenor beyond a period of 8 years. On the other hand, fixed deposits have a flexible tenor ranging from 12 months to 60 months.
Although a Senior Citizen Savings Scheme provides income tax benefits under Section 80C, the interest earned is taxable. Whereas, fixed deposit returns are taxable only if total interest income earned in a year exceeds Rs. 10,000. In case of FDs, senior citizens can submit Form 15H if they are eligible to avail tax exemption.