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What is Gratuity and How to Calculate Your Eligible Amount? Research Team | Posted On Friday, March 13,2020, 04:36 PM

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What is Gratuity and How to Calculate Your Eligible Amount?



Gratuity is the benefit that employees get as a result of a long term relationship with the organization. Payable under the Gratuity Act 1972, it is paid to an employee as a token of appreciation for rendering services to the organization. Only those employees who complete 5 years in an organization are eligible for gratuity.

Gratuity is not a fixed amount or percentage that must be paid by the employer. Depending on the employer’s choice, gratuity can be paid from the profits the company makes or from a group plan of insurance companies. If the employer opts for a group plan with an insurance provider; then fixed annual contributions are made. The employees can also make voluntary contributions to the gratuity fund.

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What is Gratuity and How to Calculate Your Eligible Amount?​

Key points on gratuity:

  1. Employees receive gratuity from the employers.
  2. Taxes are applicable on the gratuity amount.
  3. In the recent interim budget announcement, taxation rules have been changed for gratuity. There will be no tax on gratuity up to Rs 20 Lakhs.
  4. If an employee has been asked to leave the company for misconduct or bad behaviour, the employer has all rights to deny the payment of his or her gratuity amount even if they have completed 5 years of service.
  5. If the employee dies while still in service, his or her nominees get the gratuity amount.

See Also: How To Calculate Gratuity?

What is The Eligibility for Receiving Gratuity?

To receive gratuity, you must fulfil the following conditions:

  1. You must have completed a minimum of 5 years of service with a single employer.
  2. You should be eligible for superannuation.
  3. You must have retired.
  4. If you resign, 5 years must be completed with the underlying employer.
  5. In case of death of the employee or total or partial disability pertaining to an accident or illness.

How To Calculate Gratuity?

The calculation of gratuity involves a number of factors. Depending on your current salary and total years of service, the gratuity amount can be determined.

The formula is: Y*S*15/26


Y is the total number of years served in the company.

S is the last basic salary drawn from the company plus Dearness Allowance.

See Also: Payment Of Gratuity Act 1972

Here is an Example to Understand the Calculation of Gratuity:

Rutvi is a business consultant with a consulting firm. She has been working for over 12 years in the same organization. Her last drawn basic salary was Rs 95,000 which is inclusive of DA.

The gratuity amount for Rutvi will be calculated as:

12*95000*15/26 = Rs 6,57,693.

In case the gratuity amount works out to be greater than Rs 10 Lakhs, the sum will not be called gratuity. It will be called ex-gratia. Ex-gratia is an employers’ voluntary contribution to employees’ fund and is not governed by any particular rule or law. The employer may choose to give ex-gratia.

For the purpose of calculation of gratuity, the service years are rounded off. This means if you have worked for 7 years and 5 months then your gratuity will be calculated on the basis of 7 years. If you have worked for 7 years 7 months then your gratuity will be calculated on the basis of 8 years. This is how the rounding off takes place.

How is Gratuity Calculated in Case of Employees Not Covered Under the Gratuity Act?

Gratuity can be paid to employees who are consistent performers. The calculation of gratuity, in this case, is done on the basis of half a month’s salary. The dearness allowance and commission on sales is also included in this case.

See Also: Gratuity – Check Gratuity Calculation

The Formula is:

Gratuity amount = (15 * last drawn salary * service period) / 30.

For example, Siya worked in an IT company for the last 10 years but is not eligible for gratuity payment. Her employer, however, decides to pay gratuity. The calculation for Siya’s gratuity would be: 

Gratuity = (15*50,000*10) / 30 = Rs 2,50,000.

The gratuity amount is considered to be a tip from the employer in appreciation of services rendered. Depending on the years of service and last drawn salary, the gratuity amount varies for different employees across the organization.

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