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 minimum 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).

Must read – 10 Things about payroll you always wanted to ASK!

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 numbers of years of service and last salary.

Let’s understand this with an example:

Suppose completed years is 7 years and 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, 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, lets learn calculating gratuity for rest two.

Condition 2:

Suppose completed years is 6 years, 3 months and 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 completed years is 7 years, 8 months and 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, number of months more than or equal to 6 is considered as 1 year. Hence, 7 years and 8 months is 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 their retirement or is laid-off.

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

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

In the case of 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 of 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 last drawn salary by employer and number of years served at the company. The salary here includes dearness allowance and commission received on sales.

Takeaway

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