Gratuity is a financial benefit employees receive after completing a specified service period with their employer. Understanding how to calculate gratuity can be empowering, especially when planning for financial security. Thankfully, with the gratuity calculation formula, estimating your gratuity is simple. This guide will walk you through the formula step-by-step, ensuring you feel confident about the process.
What Is Gratuity?
Before we discuss the details of the gratuity calculation formula, let’s understand the meaning of gratuity. Gratuity is a sum of money paid by an employer to an employee as a token of appreciation for their long-term service. Under the Payment of Gratuity Act of 1972, gratuity is payable to employees who have completed at least five years of continuous service in an organisation. It becomes an essential financial buffer when an employee retires or resigns from their position.
Who is Eligible for Gratuity?
- Employees who have served five or more years continuously usually qualify for gratuity.
- Employers who work in companies with a minimum of ten staff members.
- For employees who are full-time workers on the payroll, contract workers are usually not eligible.
- Gratuity can be paid five years before, in some cases, including death or disability resulting from accident or disease.
How to Calculate Gratuity?
2. For Employees Covered Under The Gratuity Act:
The formula for calculating gratuity for employees covered by the Act is as follows:
The last drawn salary is divided by 26, multiplied by 15, and multiplied by the number of years of service. It refers to the employee’s basic salary and the dearness allowance. The gratuity amount is calculated based on the average basic salary earned by the employee over the past ten months. Here, 26 denotes 30 days in a month, excluding four Sundays.
For employees subject to the Act, the ‘number of years’ in the gratuity calculation is rounded up to one year: a duration of six months or more is rounded up to one year, while periods less than six months are not considered.
Let us examine two scenarios:
Scenario 1: An employee employed by a company for eight years and six months. The duration for gratuity calculation is nine years.
Scenario 2: An employee served for eight years and four months, and the duration has now reached eight years.
Given an employee’s last drawn salary (basic plus dearness allowance) of ₹25,000 and years of service completed of 10, the gratuity amount will be 25,000/26 x 15 x 10 = ₹1,44,230.
2. For Employees Not Covered Under the Gratuity Act:
30 x 15 x Number of years of service / Last drawn salary is the formula that is used to determine gratuity for employees who the Gratuity Act does not cover:
Here, 30 days are counted as the employee’s working days for the month. For employees who are not covered by the act, there is a difference in payment based on the actual number of years of service completed.
Gratuity is a crucial financial reward for long-term service. Understanding the gratuity calculation formula helps you plan your finances and get your gratuity. Calculating gratuity can be overwhelming, but the Gratuity Calculator can help.
Mastering the gratuity formula is crucial to financial security, whether planning for retirement or understanding your financial rights.
