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What is gratuity?

Gratuity is the monetary benefit offered by an employer to an employee for the services rendered by them during their period of employment. Generally, employers pay gratuity at the time of retirement, but it can be paid earlier, provided that certain conditions drawn by the company are met.


How is gratuity calculated?

The calculation of gratuity depends on two major factors: The last drawn salary, and the number of years of service an employee works for the organization. As per the Payment of Gratuity Act 1972, gratuity should not exceed an amount of 20 Lakhs.

Gratuity = ( Number of year * Last drawn basic salary plus DA * 15 ) / 26

For example, if an employee has worked with an organization for 20 years and had Rs. 25,000 as their lat drawn basic salary plus DA, then,

Gratuity = ( 20 * 25,000 * 15 ) / 26 = Rs. 2,88,461.54

However, if an organisation is not part of the Gratuity Act, they can still pay gratuity. The calculation is based on the employee’s half month’s salary for every year that has been completed. The salary includes commission (sales based), dearness allowance, and basic salary.  

Gratuity = ( 15 * Last drawn salary * Period of service) / 30 days  

For example, if an employees has been at a company for 10 years and 8 months and their salary is Rs. 50,000, the calculation of the total amount of  gratuity is done as follows:

Gratuity = (15 * 50,000 * 11) / 30 = Rs. 2.75 lakh

What is the eligibility for gratuity?

Following are the few instances when an employee will be eligible to receive gratuity: \

  1. An employee should be eligible for superannuation
  2. An employee retires
  3. An employee resigns after working for five years with a single employer
  4. In the case of the death of an employee, or disability due to an illness or accident, or disease