How To Calculate Gratuity?

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Calculate Gratuity

Under The Payment of Gratuity Act, 1972, Gratuity is the lump sum amount of money that an employer pays its employees as a token of appreciation for the services rendered by them. Gratuity is one of the components that make up the Gross Salary of an employee. The employees are only eligible to withdraw the gratuity amount after they complete a period of 5 years in the same organization. 

Apart from this basic information, there are multiple other queries related to Gratuity that pop in the heads of working professionals.

Mentioned below are the 5 FAQs that we have selected out of the many others:

    • Is gratuity taxable?
    • How to check the gratuity amount?
    • How to withdraw gratuity?
    • What is 15 26 in gratuity calculation?
    • How do employees make gratuity payments?

Is Gratuity Taxable?

The Income-tax Act, 1961 exempts Gratuity from tax up to a certain limit. The tax applicability depends on the nature of the employee’s job who earns the gratuity. There are three cases:

  • The gratuity provided to the government employees (central, state or local) is exempt from tax 
  • Other eligible employees whose employers are covered under The Payment of Gratuity Act,1972, their last drawn salary of only 15 days is tax exempt
  • For the rest whose employers are not covered under The Payment of Gratuity Act,1972, the least of the their gratuity amounts will be exempt from tax:
  • INR 20 lakhs
  • The actual gratuity amount received
  • Salary of half month for every year of employment that the employee has completed with the company  

How To Check Gratuity Amount?

An employer has different ways to show gratitude to the employees for their extraordinary service and hard work during the period of employment. One such benefit offered to the workforce is by giving away the gratuity amount. 

Gratuity can only be withdrawn after the completion of minimum five years in the same organization, at the time of leaving or retirement from the job. 

Under The Payment of Gratuity Act, 1972, gratuity is calculated as 4.81% of the Basic Pay.

The simplest formula to calculate Gratuity earned by an employee using CTC amount is as follows:

Gratuity = 15/26 * Last Drawn Salary (Basic Salary + Dearness Allowance) * Number of Completed Years of Service

Now you can instantly check your gratuity amount using HROne’s

automated gratuity calculator:

Gratuity Calculator

How To Withdraw Gratuity?

4.81% of the employees’ Basic Pay is deposited by the employer into the Gratuity account every year. This amount matures when the employee completes 5 years of service in the same organization. In order to be able to withdraw the Gratuity amount, the eligible employee must either leave the organization after the completion of 5 years or he/she can make the withdrawal at the time of retirement. In any other case, no company would allow the withdrawal of gratuity. 

If you wish to know about The Payment of Gratuity Act, Forms, Eligibility and more in detail, read this blog: https://hrone.cloud/payment-of-gratuity-act-know-the-forms-eligibility-and-more/

What Is 15 26 In Gratuity Calculation?

In the formula to calculate gratuity amount, i.e.,

Gratuity = (15/26)*A*B 

where A is the total no. of years served in the company

and B is last drawn salary

Here, 15 being wages for 15 days 

and 26 being the number of working days in a month.

How Do Employers Make Gratuity Payments?

Employers either pay the gratuity amount to their employees from their personal accounts or a general gratuity insurance plan with a service provider. They then pay annual contributions to the service providers who, in turn, pay the gratuity to the eligible employees. 4.81% of the Basic Pay of employees’ salaries is contributed towards the gratuity funds every month by the employer. Policies, rules, and regulations are specially taken care of while making this payment.

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Sukriti Saini

Sukriti Saini works as a content marketing strategist at HROne. She has done Bachelors in Journalism from Delhi University and carries several years of experience in content development. HR trends, Productivity, Performance and topics related to Employee Engagement garner most of her writing interest here. During leisure, she loves to write and talk about fashion, food & life.

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