Importance of Gratuity in Our Life

8509 views • 4 mins read
Importance Of Gratuity

Savings are essential and today’s generation strikes a balance between spending and saving wisely. We are working in various companies handling our respective positions but most of us are still reckless about our employee rights that have been given to us by the government of India. Such rights are related to our retirement plans that make us cash rich and solid in our frail days. Gratuity is one such benefit that is meant to bring stability, loyalty and the fruit of the two that is lump sum money.

What is Gratuity

We have heard this term ‘GRATUITY’ from our elders many times but have not dig into the matter as it seems unrelated to us. The government of India has defined gratuity as “lump sum money that a company pays when an employee leaves an organization in the form of retirement or job change”. The gratuity is applicable only to those that have served with the employer for more than 5 years in the private sector and 10 years in public sector. The government of India introduced gratuity under Payment of Gratuity Act, 1972. It is a financial incentive given to an employee for being in service and for his loyalty towards the company. It acts like a benefit that acts as post retirement plan.

How is gratuity calculated in business world?

240 working days in a year is considered as 1 year for gratuity calculation. In a month 26 days are considered as 1-month salary. Gratuity calculation formula is based on income and number of years of service.

For the employees that are working in corporate jobs and get monthly salary, the law states:

Gratuity = 15 Days of Monthly Salary for Every Completed Year Of Service

The Formula to Get the Gratuity Amount:


[* Applies for multiplication]


SALARY = Basic pay + Allowance + Commission

TENURE = Number of years of service

15 = Days for which salary is considered per month

26 = number of working days in a month (irrespective of 5 or 6 days working per week)

Gratuity is also payable if:

  • An employee dies and he is paid for the number of years he has worked with the company regardless of tenure.
  • If an employee becomes physically challenged due to some illness or mishap. Again, the tenure is not applied here, only number of years.

Gratuity is not payable if:

  • The employee has been terminated on the grounds of illegal activity, violence, immoral act or theft.
Disclaimer: Gratuity has to be paid by the employer from the date it is payable to the person. If this does not happen then the company has to pay simple interest from the date of admissibility till the date of actual payment. Also, one can start counting his working years for gratuity from probation period itself.

Gratuity Rules:

  • Last drawn salary is considered for gratuity calculation. If Ms. Rita for example was earning 60000 Rs before she resigned or retired, the gratuity will be calculated on this salary.
  • Gratuity is applicable to firms with more than 10 employees.
  • The government has defined maximum limit of gratuity and that amount is 20 lakh. This amount is tax-free.
  • If an employee is given more than 20 lakh as his gratuity than the tax will be applicable on the rest of the amount. Say for example Mr. Anil has received 35 lakh as his gratuity than the tax will be applicable on 15 lakhs. (35-20 =15 lakhs)
  • In percentage, for every year the employee will receive 57.69% of monthly salary i.e. last drawn salary from the employer.


When so much math and logistics are involved on everyday basis, an employer must seek to simplify these processes by implementing agile and intuitive HR software that will help clean number clutters.

Make your Payroll fun and easy!

Learn how HROne Payroll software can help you automate Payroll & stay 100% compliant!

subscription arrow

Kanika Jain

Having an experience of over 8 years in blogging. Kanika Jain has written on various issues, trends and topics. Being an avid reader, writing came naturally to her. She’s an enthusiast blogger for HR-One. When not writing, she likes being a fitness freak and a movie junkie.

View all author posts →