In layman’s language, a Gratuity can be considered as a token of gratitude that employers give to their employees for serving their organization for a significant amount of time (5 years). It is widely known as the retirement benefit that an employee is eligible to receive if he has served in an establishment for 5 or more years continuously.
Even though an employee can enjoy exemption from tax on gratuity amount of up to Rs. 20 Lacs; according to the Payment of Gratuity Act, 1972 it is still viable to calculate the Gratuity amount that an employee should be given at the time of retirement, resignation, disability or death. Depending on the salary package, the total number of years the employee has served in the organization, the gratuity amount differs every time.
So, let us look at the formula and understand the way it is calculated in different scenarios.
To calculate the gratuity amount, the last drawn salary and the number of years the individual has served should be considered.
First of all, you should calculate the average pay that the employee gets for 15 days,
Average 15 day pay= 15 days(last basic salary/ 26 working days of the month)
Thereafter, you will get the final amount by putting the figures in the below-mentioned formula;
Total Gratuity Amount= Average 15 day pay x total years served
How to Calculate Gratuity?
If Amar, a developer, has worked with HROne for 20 years and the last salary he withdrew Rs. 35,000 as his last basic and DA amount, then,
Amar’s Average 15 day pay = 15 days (35,000/26)
= 15 days x 1,346
= Rs. 20,190
Amar’s Gratuity amount= 20,190 x 20
= Rs. 4,03,800
Important: In the last year of employment, if the employee has completed 5 years 6 months then it is rounded off to 6 years and if the tenure is 5 years 5 months then the 5 months are considered irrelevant. The gratuity is calculated for 5 years only.
How to calculate Gratuity in case of physical disability or death?
If an individual dies or becomes physically disabled due to some misfortune then that employee becomes entitled to the gratuity benefits even if he has not rendered his services to the company for a total of 5 years or more.
Take a look at the below-mentioned table to understand the way gratuity is calculated in case of death or physical disability.
|Service tenure||Gratuity calculation|
|Less than a year||2 x Basic Salary|
|More than a year but less than 5 years||6 x Basic Salary|
|5 years or more but less than 11 years||12 x Basic Salary|
|11 years or more but less than 20 years||20 x Basic Salary|
|20 years or more||Basic salary of every completed 6 months period/2 (Make sure you don’t exceed the 33 time limit of the basic salary)|
Even though using payroll software makes calculating gratuity a lot easier, as an HR or employee it is imperative for you to understand Gratuity eligibility and rules thoroughly. In case of any questions related to gratuity, write to HROne on any of our social media platform or mail us at ___________________.