How is gratuity calculated, when are you eligible?

When an employee has worked for the company for a certain amount of time, they are entitled to a financial benefit called a gratuity. It usually takes the form of a lump sum payment and serves as a means by which employers can express their gratitude for the contributions of long-term workers. The Payment of Gratuity Act, 1972 governs gratuities in India, and it is a requirement for employers to offer this benefit to qualified employees. Given that it depends on a number of variables, gratuity calculation can be somewhat complicated.

The duration of employment, and basic pay, all affect how much gratuity is given. The Act states that a person is eligible for gratuity if they have served for five or more years and their age and service qualify the criteria of the Act. However, when it comes to calculating gratuity, the amount is based on the employee’s salary and the number of years served.

1. For employers covered under the Gratuity Act: (with 10 or more employees)

Gratuity = n*b*(15/26)

n = Duration of employment with the firm

b = Last basic salary + dearness allowance that was drawn

For example, let us assume that the number of years of service is 6 years, and the last drawn salary along with dearness allowance accounts for ₹50,000. In that case, the gratuity calculation formula in India will work as the following:

Gratuity = 6*50,000*(15/26) = ₹173076

2. For employers not covered under the Gratuity Act

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

For example, if an employee's last drawn salary is Rs. 60,000 and they have completed 7 years of service, their gratuity will be calculated as follows:

Gratuity = Rs. (15*60,000 * 7)/30

= Rs. 2,10,000

In addition to the base formula, the gratuity amount may also be subject to tax deductions, depending on the employee’s income level and tax bracket.

The Payment of Gratuity Act, of 1972 is an important law for employees in India, as it ensures that employees receive gratuity when they leave their job. The act also regulates the calculation of gratuity, giving employees the assurance that they will be fairly compensated. To get the exact Gratuity amount you can use the Gratuity Calculator. By understanding when you are eligible to receive gratuity and how it is calculated, you can ensure you receive the compensation you deserve.