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Pros And Cons Of Retirement Gratuity
Remy Sharp
Harsha Rajpal
February 23,2023

What is Retirement Gratuity?

Retirement gratuity is a lump sum payment made to an employee upon their retirement from a company. It is typically based on a certain number of years of service with the company and the employee's salary at the time of retirement. The purpose of retirement gratuity is to provide financial security for the employee in their post-working years. It is usually a statutory benefit and governed by laws like the Payment of Gratuity Act, 1972 in India. The need for retirement gratuity arises from the fact that as people are living longer, the cost of living is increasing, and traditional pensions are becoming less common, and people are now more dependent on their own savings and investments to support themselves in retirement. For employees who do not have sufficient savings or pension plans, retirement gratuity can provide a source of income that can help them meet their expenses in their post-retirement years.

How to calculate Retirement Gratuity?

Retirement gratuity is typically calculated based on the employee's salary at the time of retirement and the number of years of service with the company. The exact formula for calculating retirement gratuity can vary depending on the company's policies and the laws of the country. But generally, it is calculated as follows: In India, as per the Payment of Gratuity Act, 1972, Gratuity is calculated as follows:

  • (Last drawn salary x 15 days) x number of completed years of service
  • Where, last drawn salary is the basic salary, dearness allowance and commission based on fixed percentage of sales, if any.
  • It's important to note that, there are certain limit of gratuity amount that can be paid to employee as per the act, which is currently Rs 20 Lakhs. Additionally, there are certain rules that apply like- employee should have completed minimum of 5 years of service with the company to be eligible for gratuity.
  • It is always best to check with your company's human resources department or consult the relevant laws in your country to get a clear understanding of how retirement gratuity is calculated in your case.

Benefits of Retirement Gratuity:

  • Provides financial security for employees in their post-working years
  • Can be used to pay for expenses such as medical bills, living expenses, and other costs associated with retirement
  • Can be a significant source of income for employees who do not have sufficient savings or pension plans
  • Provides an incentive for employees to stay with a company for a longer period of time

Drawbacks of Retirement Gratuity:

  • The amount of gratuity can be small, particularly for employees who have only been with a company for a short period of time
  • Not all companies offer retirement gratuity
  • The gratuity is usually only paid out upon retirement, so it may not be available to employees who leave a company before reaching retirement age
  • The formula for calculating retirement gratuity can be complex and may not be fully understood by employees
  • The gratuity is usually a one-time payment and may not be sufficient to provide long-term financial security
  • In some countries, it may not be tax-free, so employee may have to pay taxes on the gratuity received.
  • It's important to note that, retirement gratuity is not a substitute for a pension plan or other forms of long-term retirement savings and investment. It's always a good idea to diversify your sources of retirement income to ensure that you have enough money to cover your expenses throughout your retirement years.

How can PensionBox help with Retirement Gratuity?

PensionBox is a digital retirement savings platform that can help employees with their retirement gratuity. It's a platform that provides employees with a way to save for their retirement and manage their retirement savings. It allows employees to see all their retirement savings in one place and manage them from one account. PensionBox can help with retirement gratuity in several ways:

  1. Automated Savings: PensionBox can automate the savings process by deducting a set amount from the employee's salary and depositing it into their retirement savings account. This can help employees save for their retirement gratuity without having to think about it.
  2. Investment Management: PensionBox can help employees manage their retirement savings by providing them with investment options and guidance. This can help employees grow their savings and increase the amount of gratuity they will receive upon retirement.
  3. Retirement Planning: PensionBox can help employees plan for their retirement by providing them with retirement calculators and other tools. This can help employees understand how much they need to save in order to receive the gratuity they desire upon retirement.
  4. Access to the Account: PensionBox gives employees access to their account at any time, so they can check their savings and make changes as necessary.
  5. Transparency: PensionBox provides transparency in terms of charges, returns and other important details, which can help employees to understand the financial aspects of their savings. So donot delay, Signup and start saving!

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