# Gratuity - Formula, Rules, Limit, Eligibility & Calculation 2020

## Gratuity: Know All About Gratuity Fund

### What is gratuity?

Gratuity is a mandatory retirement benefit received by the employee from the employer, for his services to the organization, for a sustained period of five years or more. It was initially started as a payment plan for employees working with factories but now also extends to establishments under government control, having branches in multiple states.

### Eligibility criteria

An employee who has rendered services for five years or more is eligible for receiving gratuity benefit. The service rendered needs to be continuous. However, this rule is relaxed in cases of early death and disablement which can disqualify the employee from continuing work.

### How does gratuity payment work?

Usually, the company pays out the gratuity from their pocket or can take an insurance plan for a group of employees as a whole. Unlike employee provident fund which includes employee's contribution, the gratuity amount is entirely paid by the employer.

Under the Payment of Gratuity Act, 1972 a certain percentage of the salary is calculated and deposited in a gratuity account payable at a later date. It works as a superannuation benefit for employee after they leave it. The Act covers all companies with more than ten employees.

Gratuity amount is payable at the time of resignation, retirement /superannuation, layoff or voluntary retirement, death, retrenchment, disability or termination. In case of death, the proceeds are payable to the nominee of the employee.

### How to calculate the gratuity amount in India?

Calculation of gratuity considers the number of years of service in a company, the last drawn basic salary and dearness allowance.

### The formula for calculation of gratuity

As per the gratuity calculation rule, for every year completed in excess of six months or in part after that, requires the calculation to be done at the rate of 15 days wages. The calculation is done on the last drawn salary. The number of working days in a month is taken as 26 days – this is beneficial for the calculation. The last drawn salary is divided by 26 and then multiplied by 15 to get the gratuity per year.

Gratuity = Basic + D.A of last drawn salary x (15/26) x Number of years of service

The basic component of the last drawn salary is taken into account. Also for government employees, dearness allowance is accounted for.

### Advantages of investing gratuity funds in fixed deposits

Once you receive your gratuity on retirement, it is natural to find equally stable and high yielding options to use these funds. After thirty to forty years of service, this can be a large amount which should be used wisely to earn you high returns. Also, as a young professional, you will receive gratuity amount on resigning from your job after a continuous service of five years. You will have a sizeable surplus amount to invest.

A fixed deposit with high interest rate and assured returns will ensure your financial well-being even if other high-growth investments in your portfolio do not perform as expected. And here are more reasons to invest your gratuity funds in fixed deposits:

1. Fixed deposits ensure high stability for your funds – Fixed deposits are far away from the volatility of the stock market movements. Fluctuations in stock markets do not affect the returns on fixed deposits. Also, changes in interest rates are not too frequent to disturb your return calculations.

2. A high yielding rate of interest - Company fixed deposits like Bajaj Finance Fixed Deposits offer the best interest rates in the market, as high as 8.35% for 3- 5 years. Senior citizens can avail an additional 0.25% interest rate. You can also take advantage of multiple FDs placed with a maturity date one after the other. This concept of laddering will ensure a continuous flow of FD income.

3. Fixed deposits are apt for ensuring liquidity - FDs provide instant liquidity in times of emergency. You can avail the withdrawal by paying a small penalty and receive immediate cash for use.

4. Flexible tenors help you ladder your investments - The flexibility of tenors can help you plan your financial corpus in line with various tenors available. You can choose tenors from 12 to 60 months and go for cumulative FD option to gain maximum returns. You can split your gratuity amount into multiple FDs (each with a minimum investment of Rs 25,000) with subsequent maturity timelines.

5. Loan against FD - Fixed deposits can help you pay off a liability by taking a loan against FD for up to 75% of the value of the FD. This can be used to pay for emergencies or loans.

6. Cumulative and non-cumulative option - Cumulative FD option allows you to build a corpus over time by adding the interest component to the existing principal.

The non-cumulative FD option allows interest payment at fixed intervals as chosen by you. You can use this payment to either fulfill your ongoing financial needs or invest it further into a monthly plan or another FD.

7. Safeguard your funds against inflation - You can achieve protection against inflation by creating multiple short tenor FDs. By taking advantage of various interest rates at different tenors, you can beat inflation and gain real interest earning.

It is important to plan your post-retirement finances smartly. Bajaj Finance FD is one of the safest and highest earning options you can consider.

Bajaj Finance FDs come with a credible performance track record and payment history. These are certified by ICRA's MAAA (stable) and CRISIL's FAAA/Stable ratings. You can rest assured of the safety and stability of your hard-earned gratuity money and earn good returns.

You can follow a simple process for an online application to open an FD account and avail the benefits of this FD. Click here to invest now.