What is Gratuity & where to Invest Gratuity Money to Get Higher Returns?

In India, working individuals receive monetary payments from their employers on retiring. If you wonder what is gratuity, it is usually a retirement benefit offered as gratitude towards the services provided. The amount aims to help individuals financially post their retirement. Employees can also claim their gratuity amount before on conditions like disability due to disease or accident and death.

An individual is eligible for gratuity only when he completes at least 5 years of service with a company. These days, both private and public sector employers under the Gratuity Act can offer this monetary benefit to their employees.

Understanding the Gratuity Act in India

The Parliament passed the Payment of Gratuity Act 1972 in August 21st which aims to govern this retirement benefit. It applies to the nation on the whole, and precisely, port, oilfield, mines, plantation, factories, railway companies, etc. Apart from these, the Act applies to those organisations with a minimum of 10 employees on payroll.

Section 4 of the Gratuity Act mandates the payment of gratuity money to eligible employees. While there are different formulae to calculate this amount, the maximum payment has been increased to Rs. 20 Lakh under Section 4(3).

Now, as you know what is gratuity, know its calculation process, and how to invest after you retire.

Calculation process of gratuity money in 2019

There is no such specific percentage of how much gratuity an employee shall receive. Companies usually take a formula-based approach or often pay more, appreciating the employee’s contributions towards the organisation. It primarily depends on two factors:

  1. Total years of service.
  2. Last drawn salary.

The Payment of Gratuity Act 1972 segregates employees of non-government organisations into the following categories:

Employees not covered under the Act

Companies which are not covered under the Gratuity Act can also provide this monetary benefit. They calculate the amount payable depending on half-month’s salary for every completed year. Below is the standard formula for this category:

(Last drawn salary x years of service x 15)/30 = Gratuity

Here, the completed service years are considered as the total years of service in a company.

Employees covered under the Act

Organisations which are covered under Gratuity Act follow a separate formula where 6 or more months are taken as 1 year. Suppose, an employee has offered continuous service of 5 years 8 months, the total number of working years shall be 6. If the same is 5 years 3 months, the employee’s tenor shall be 5 years.

The formula to calculate gratuity amount is: (15 x last drawn salary x years of service)/26.

Note that the last drawn salary in both these cases constitutes basic salary plus dearness allowance.

Where to invest your gratuity fund?

In India, several investment options are available to grow your gratuity money. One of the most stable avenues with higher returns is a fixed deposit.

As FDs are not market-linked, no fluctuations or market conditions impact the investment. With a fixed deposit in your investment portfolio, you lower the risk exposure and receive guaranteed returns.

Some of the advantages of this investment option are as follows.

  1. Fixed deposits from reputed financial institutions come with attractive interest rates for regular customers. Senior citizens receive an even higher rate for more returns on this investment.

For example – Bajaj Finance Fixed Deposit offers a rate of interest up to 8.70% for eligible customers. Senior citizens are eligible for an additional 0.35% return to grow their retirement corpus steadily.

  1. FDs from leading organisations often have stability ratings to certify their safe returns. The only NBFC in India to possess S&P Global’s international rating of BBB is Bajaj Finserv. Their FDs have the highest stability ratings from ICRA (MAAA) and CRISIL (FAAA). Moreover, you can get financially independent with the Bajaj Finserv FD.
  2. You can opt for a cumulative or non-cumulative FD as per your requirement. Cumulative FDs brings higher interest returns which investors receive at the time of maturity. Non-cumulative FDs offer the option of period interest payouts which especially helps senior citizens meet their day-to-day expenses effortlessly. You can choose annually, half-yearly, quarterly or monthly payouts.

Besides, there are various other ways in which fixed deposits are better investment options than others.

If you have a larger amount, choose to invest in multiple deposits and select different tenors along with interest payout frequencies. Not only the returns but proper understanding of what is gratuity is important for investing. Invest the funds obtained from the gratuity value into a fixed deposit and generate considerable returns. Use an online FD calculator and plan your gratuity money accordingly to reap the maximum financial benefits.

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