A Comprehensive Guide to Estimating Employee Benefits and Retirement Savings

Gratuity is an employee benefit that serves as a form of retirement savings. In India, gratuity is governed by the Payment of Gratuity Act, 1972, which requires employers with ten or more employees to provide the benefit to their workers. The act ensures that employees who serve their organization loyally and diligently for five years or longer are fairly compensated when they leave the organization.

What does CKYC mean?

Before calculating gratuity, it is important to understand CKYC (Central Know Your Customer). CKYC is a centralized Know Your Customer (KYC) registry that was implemented to streamline the KYC process for financial firms, including banks, mutual funds, insurance companies, and other financial institutions. Under CKYC, an individual can complete a single KYC form and access multiple financial services without having to complete separate KYC processes for each provider.

Now that we have a basic understanding of CKYC, let’s move on to calculating gratuity and retirement savings in India.

Calculating Gratuity in India

Gratuity is calculated based on an employee’s last drawn salary and the length of their service in an organization. The formula for calculating gratuity is as follows:

Gratuity amount = (last drawn salary x 15/26) x number of years of service

Last drawn salary refers to the basic salary and dearness allowance, or the average monthly salary received by an employee during the last ten months of their employment. The fraction 15/26 represents fifteen days in a month and 26 working days in a month.

Note: An organization can choose to provide better benefits than what is prescribed by the law.

Assuming an employee earns INR 50,000 per month and has completed ten years of service, their gratuity amount would be:

Gratuity amount = (50,000 x 15/26) x 10

= INR 2,88,461.54

As per the Payment of Gratuity Act, the maximum amount of gratuity payable to an employee is INR 20 lakhs.

Retirement Savings in India

Apart from gratuity, there are several other retirement savings options available to Indian employees. Some of the most common ones include:

1. Employee Provident Fund (EPF)

EPF is a mandatory savings scheme that is applicable to all organizations employing more than 20 individuals. The scheme is aimed at providing financial security to employees after their retirement. The employee contributes 12% of their basic salary and dearness allowance, and an equal contribution is made by the employer. Interest is earned on the employee’s contributions and, at the time of retirement, the accumulated savings along with interest are paid out to the employee.

2. National Pension System (NPS)

NPS is a voluntary savings scheme that was launched by the government of India in 2004. The scheme is open to all Indian citizens between the ages of 18 and 65. Under the scheme, employees can contribute a portion of their salary towards their retirement savings. The contributions are invested in a variety of funds, and the employee can choose the percentage allocation for each fund. After retirement, the accumulated savings are used to purchase an annuity plan that provides a regular pension income to the retiree.

3. Public Provident Fund (PPF)

PPF is a savings scheme that is offered by the government of India. The scheme is open to all Indian citizens and is aimed at encouraging savings for retirement. The scheme has a lock-in period of 15 years. Interest is earned on the savings, and the accumulated savings along with interest are paid out to the investor at the time of maturity.

Gratuity Calculator India

There are several online gratuity calculators available on the internet that make it easy for employees to estimate their gratuity amount. These calculators require the employee to input their last drawn salary and the number of years of their service. Once the inputs are entered, the calculator provides an estimate of the gratuity amount. It is important to note that the calculation provided by the online calculators is only an estimate and might not be accurate. It is always better to confirm the calculation with your organization’s HR department.

Summary

Gratuity is an employee benefit that is provided as a form of retirement savings in India. The benefit is calculated based on an employee’s last drawn salary and the length of their service in an organization. The maximum amount of gratuity payable to an employee is INR 20 lakhs. Apart from gratuity, there are several other retirement savings options available to Indian employees, including EPF, NPS, and PPF. Online gratuity calculators can be used to estimate the gratuity amount, but it is always better to confirm the calculation with your organization’s HR department.

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