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How Is Gratuity Calculated: Eligibility and Formula for Gratuity

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Gratuity Meaning

Gratuity is a monetary benefit for the services rendered to the company by an employer to an employee. It is compensated upon retirement, resignation layoff or dismissal if the person has performed five years of constant service before quitting the company. In certain instances, the rule of continuous 5-year service is extended, such as death or disability. You can use the gratuity calculator to estimate the amount of money you can get whether you plan to leave your work after a period of five years of service or are looking forward to your retirement. There is no fixed percentage laid down in the legislation for the amount of gratuity that an individual is supposed to receive. Two things depend on the gratuity payable: the last salary received and period of service. The Payment of Gratuity Act, 1972, separated non-government employees into two sections in order to calculate how much gratuity is payable:

 

1. Employees covered under the Act

2. Employees not covered under the Act

Those two categories include all private and government employees. There are more heads to be taken into account for government employees that are unique to their pay structure, like the Dearness Allowance. Those organizations that have at least 10 employees working for the past 12 months on a single day are needed to pay gratuity.

Gratuity Eligibility

  • He/She must be eligible for superannuation
  • He/She must have retired from the job
  • He/She must have resigned after remaining employed for 5 years with the organization
  • In case of death and disability of the employee

How gratuity is calculated

The sum of the gratuity relies on work duration and the last paycheck earned. It is calculated according to this formula: Last salary is drawn (basic salary plus dearness allowance) x number of years of service completed x 15/26.

The period of more than six months or more is counted as one year according to this formula. That ensures that if you have resigned after remaining employed for 5 years with the company have achieved five years and seven months of service, the number of years would be counted as six years for the gratuity benefit. On the other hand, if the contractual duration is five years and five months, it will be counted as five years for gratuity calculation. Under the Gratuity Act, the gratuity sum can't be more than Rs 10 lakh. The excess would be deemed ex-gratia. If the last few months are more than 6 months in the last year of work then it will be rounded to next number Assume your term of service is 16 years 7 months, so you earn a 17 year gratuity. Then for 16 years, for 16 years 4 months.

How Is Gratuity Calculated: Eligibility and Formula for Gratuity
 

Gratuity Formula

Employees covered under the Act

This is a method which is used to calculate the amount of gratuity payable. The calculation is based on the last pay of 15 days for each year of service performed or half of it for longer than six months. The calculation is as follows:

15 x last drawn salary x tenure of working divided by 26

The last pay here includes the basic wage, the dearness allowance and the commission earned on sales. Suppose the last basic pay received by A is Rs 60,000 a month, and he has been employed with XYZ Ltd for 20 years and 7 months. In this scenario, the gratuity will be determined using the formula above as:

(15 x 60,000 x 21)/26 = Rs. 7.26 lakh

Employees not covered under the Act

There is no regulation that prohibits an employer from paying his workers for gratuity even if the company is not covered by the Act.

For each finished year, the amount of gratuity owed to the employee can be determined on the basis of half month's salary. The wage here also includes basic, dearness allowance, and sales-based commission. The formula is stated below.

(15 x last drawn salary x tenure of working) divided by 30

In the example stated above, if A's organisation was not covered by the Act, its gratuity will be measured as: (15 x 60,000 x 20)/30 = Rs 6 lakh. Here the number of years of operation shall be considered on the basis of each finished year. According to the website of the government's pensioners, retirement gratuity is measured as follows: one-fourth of the basic pay of a month plus dearness allowance received before retirement for each completed six monthly periods of qualifying work. The retirement allowance payable is 16 times the basic salary, up to a cap of Rs 20 lakh. In the case of an employee's death, the gratuity is paid based on the term of the job, where the overall benefit is limited to Rs 20 lakh.

Gratuity Calculation for Private Sector Employees

You can use the above formula to get approximate of the amount of gratuity you'll get. The term varies according to the inclusion of the company within the Act. It is under the scope of most private firms.

Author's Profile

Vipul Das is graduated in BCA and is covering Finance, Investment and Business related articles since the last year for goodreturns.in. You can connect with him on Facebook and Twitter

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