What is gratuity & how it is calculated ?

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Vikas Bhardwaj
Vikas Bhardwaj One month ago

Gratuity refers to the amount that an employer pays his employee, in return for services offered by him to the company. However, only those employees who have been employed by the company for five years or more are given the gratuity amount. It is governed by the Payment of Gratuity Act, 1972.

The employee can get the gratuity before five years if he/she gets disabled in an accident or due to a disease. Gratuity mainly depends on your last drawn salary and the years of service which are rendered to the Company.

The formula for Calculating the Gratuity

A. The amount of gratuity for employees whose employer is covered under the Gratuity Act can be calculated using the formula:

Gratuity = n*b*15 / 26
Where n = Tenure of service completed in the company
b = Last drawn basic salary + dearness allowance

For example, you have worked with the XYZ company for a period of 15 years. Your last drawn basic salary along with dearness allowance was Rs 30,000. Hence:

The amount of gratuity = 15 * 30,000 * 15 / 26 = Rs 2,59,615
Two points must be noted here:

As per the Gratuity Act, the amount of gratuity cannot be more than Rs 20 lakh. Any excesses would be treated as ex-gratia.

If the number of years you have worked in the last year of employment is more than six months, then it will be rounded to the nearest figure. Suppose your tenure of service is 16 years 7 months, then you receive the gratuity for 17 years. Otherwise, it's for 16 years if it happens to be 16 years 4 months.

B. For employees whose employer is not covered under the Gratuity Act, the gratuity amount would be calculated as per the half-month salary on each completed year of service.

The formula is: (15 * Your last drawn salary * the working tenure) / 30.

For example, you have a basic salary of Rs 30,000. You have rendered continuous service of 7 years and the employer is not covered under the Gratuity Act.
Gratuity Amount = (15 * 30,000 * 7) / 30 = Rs 1,05,000.


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