Gratuity is a financial benefit offered to employees as a token of appreciation for their service to the company. It acts as a retirement benefit and is typically provided to employees who have worked with an organization for a specific duration, usually at least five years. Here's everything you need to know about gratuity and how you can calculate it.
What is Gratuity?
Gratuity is a lump-sum payment given to employees when they leave an organization after serving a specified minimum period. It is governed by the Payment of Gratuity Act, 1972 in India and applies to organizations with 10 or more employees. The gratuity amount is typically paid at retirement, resignation, or in case of death or disability.
How is Gratuity Calculated?
For employees covered under the Payment of Gratuity Act, the formula for calculating gratuity is:
Gratuity = (Last Drawn Salary × 15 × Number of Years Worked) / 26
- Last Drawn Salary: Basic salary + dearness allowance
- 15: Represents 15 days of salary for every completed year of service
- Number of Years Worked: Rounded down to the nearest full year
- 26: Average number of working days in a month
Example:
If an employee has a last drawn salary of ₹30,000 and has worked for 10 years:
Gratuity = (30,000 × 15 × 10) / 26 = ₹1,73,076.92
Exceptions and Tax Implications
- For employees not covered under the Act, gratuity is calculated based on company policies. The denominator (26) may be replaced with 30.
- Gratuity up to ₹20,00,000 is tax-free in India. Any amount above this limit is taxable as per the individual's income tax slab.