What is Gratuity? How to Calculate Gratuity from your salary?

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Calculate Gratuity
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What is Gratuity in salary?


Gratuity is a cumulative amount given to an employee by his/ her employer for their service. There is a fixed formula to calculate the final gratuity amount. Gratuity in India is granted at the time of retirement or them leaving the organization.


There is also a minimum number of years of service to be eligible for the gratuity payment. This benefit is received by the employee after he/ she completes at least 5 years in the same company.


What is the meaning of gratuity? It refers to any reward. This is one of the best perks of working at a performing company.


How is gratuity calculated for private-sector employees?


Gratuity to employees is only rewarded after a tenure of a minimum of 5 years. So, how to calculate gratuity?


Calculation of gratuity involves 2 important parameters viz. accurate number of years and last drawn salary including the DA (dearness allowance).


Find the formula to calculate gratuity for employees:


Gratuity – Number of years x Last drawn salary x 15/26


The gratuity amount is directly proportional to and dependent on the number of years of service and the last salary.


Let’s understand this with an example:


Suppose the completed years is 7 years and the last drawn salary was 50,000 rupees (INR).


Gratuity calculation is as follows-

G = 7 x 50000 x 15/26 = 2,01,923 INR


Well, there are 3 possible conditions in years of service:

  • Exact number of years (like 5, 6, and so on)
  • Years plus months less than 6 (like 5 years and 4 months)
  • Years plus months equal to or more than 6 (like 5 years and 7 months)


Here, gratuity calculation for 1st condition is already explained above. Now, let’s learn calculating gratuity for rest two.


Condition 2:

Suppose the completed years are 6 years, 3 months and the last drawn salary was 50,000 rupees (INR).


Gratuity calculation is as follows-

G = 6 x 50000 x 15/26 = 1,73,077 INR


Condition 3:

Suppose the completed years are 7 years, 8 months and the last drawn salary was 50,000 rupees (INR).


Gratuity calculation is as follows-

G = 8 x 50000 x 15/26 = 2,30,769 INR


What did we understand?

While calculating gratuity, the number of months more than or equal to 6 is considered as 1 year. Hence, 7 years and 8 months are assumed as 8 years.


The maximum amount of gratuity?


However, the total amount of gratuity to an employee lies with the employer themselves. The formula helps you to calculate the minimum amount of gratuity to be rewarded.


Anyways, according to the latest 7th pay commission, an employee can be paid a maximum amount of RS. 20 lakhs in the name of gratuity. (dated 2020)


FAQ on Gratuity in India


What is Gratuity?

Gratuity is an earning and employer perk which is provided by the employer after a minimal decided year of service. This amount is provided when the employee reaches retirement or is laid off.


I have completed 4 years and 10 months of service. Am I eligible for gratuity earnings?

No, you are not! You need to complete at least a minimum of 5 years of service at the same company to get eligible for gratuity.


In the case of the life loss of an employee, is the family provided with any gratuity amount?

In such cases, with service of less than 1 year, a gratuity of 2 times basic pay is provided. For service years more than 1 and less than 5 is 6 times the basic pay.


While calculating gratuity what are the contributing factors?

Calculation of gratuity involves the last drawn salary by an employer and the number of years served at the company. The salary here includes a dearness allowance and commission received on sales.




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