Gratuity is a lump-sum financial benefit given by an employer to an employee as a token of appreciation for their long-term service and loyalty to the company. This payment is often received when an employee resigns, retires, or is terminated after completing a specific tenure (usually five years or more) with the organization. Governed by the Payment of Gratuity Act, 1972 in many countries, gratuity acts as a retirement benefit and helps support employees financially as they transition out of the workforce or move to another job.
How to Calculate Gratuity?
Calculating gratuity is straightforward, especially for employees in establishments covered by the Payment of Gratuity Act. The gratuity amount depends on three factors:
- Last Drawn Salary (Basic + Dearness Allowance)
- Years of Service (Tenure)
- A constant factor of 15 days for each completed year of service
The calculation varies slightly based on whether the employer is covered by the Payment of Gratuity Act or not. However, the most commonly used formula is as follows.
The formula of Gratuity:
For employees covered under the Payment of Gratuity Act:
Gratuity = Last Drawn Salary × 15 × Tenure / 26
- Last Drawn Salary: Basic Salary + Dearness Allowance (if any)
- 15: This represents the 15 days' salary considered for gratuity calculation.
- 26: Represents the number of working days in a month (as per Act).
Examples of Gratuity Calculation:
- Example 1:
- Last Drawn Salary (Monthly): ₹10,000
- Tenure of Service: 5 years
- Gratuity = (10,000 × 15 × 5) / 26 = ₹28,846.15
- Example 2:
- Last Drawn Salary (Monthly): ₹15,000
- Tenure of Service: 10 years
- Gratuity = (15,000 × 15 × 10) / 26 = ₹86,538.46
Rules for Gratuity Eligibility:
- Minimum Tenure Requirement: An employee is eligible for gratuity after completing at least five years of continuous service with the same employer.
- Exceptions to the Tenure Rule: If an employee becomes disabled due to accident or illness, or in cases of death, gratuity is payable regardless of the tenure.
- Maximum Gratuity Amount: In most cases, the maximum gratuity payable is capped (e.g., ₹20 lakh in India, as per current law).
- Calculation on Resignation or Termination: If an employee resigns or is terminated after five years, they are entitled to gratuity based on their last drawn salary.
Understanding gratuity is essential for long-term financial planning. It ensures employees have financial support after dedicated years of service, offering a small but valuable security during career transitions or retirement.