How Much Gratuity You Will Get After 5 Years of Job? Estimated Calculation, Salary Impact & Eligibility

For millions of salaried employees in India, gratuity is a crucial part of post-employment financial security. As per the Payment of Gratuity Act, 1972, employees who have completed at least five years of continuous service in an organisation with 10 or more employees are entitled to receive gratuity upon retirement, resignation, or under certain other conditions.

Below are all the key details you need to know about how gratuity is calculated, who is eligible, and what the tax implications are.

Who is Eligible for Gratuity?

Employees become eligible for gratuity if they have completed more than five years of continuous service in an organisation that employs 10 or more people. The gratuity is typically paid when an employee retires, resigns, is laid off, or in cases of death or permanent disability. Notably, the five-year service requirement is waived in the event of death or disability, ensuring financial support for the employee or their family under difficult circumstances.

How to Calculate Gratuity: Here's the Formula Employees Should Know

The gratuity amount is calculated using a simple but specific formula:

Gratuity = (Last Drawn Salary × Years of Service × 15) ÷ 26

In this formula, the "last drawn salary" refers to the sum of basic pay and dearness allowance. The number "15" stands for 15 days' salary for each year of completed service, while "26" represents the average number of working days in a month. For example, if an employee's last drawn salary is Rs 50,000 and he or she worked for seven years, the gratuity payable would be calculated as Rs 50,000 × 7 × 15÷ 26 = Rs 2,01,923 approximately.

When calculating the years of service, if an employee has worked for more than six months in the last year, it is rounded up to the next full year. For example, if an employee has served for six years and seven months, it is considered seven years for the purpose of calculating gratuity. However, if the service was six years and five months, it would be rounded down to six years.

Understand Gratuity Calculation

To better understand how gratuity is calculated, let us look at a few examples based on different salary levels. If an employee's last drawn salary was Rs 40,000 and they worked for six years and seven months, the gratuity amount would be Rs 1,61,538, as the service period is rounded up to seven years.

For someone earning Rs 60,000 with the same tenure, the gratuity would come to Rs 2,42,308. Meanwhile, an employee with a last drawn salary of Rs 80,000 and identical service duration would be entitled to Rs 3,23,077. These examples illustrate how variations in salary affect the final gratuity payout, even when the years of service remain the same.

Under the Gratuity Act, it is mandatory for eligible employers to pay gratuity. Companies that employ ten or more people are legally bound to provide this benefit to qualifying employees. Employers cannot deny gratuity if the employee meets the eligibility criteria, making it a protected right under Indian labour laws.

Tax Rules for Gratuity

The Income Tax Act offers tax relief on gratuity. Gratuity amounts up to Rs 20 lakh are fully tax-exempt. If the amount exceeds Rs 20 lakh, the excess becomes part of your taxable income. Understanding this limit helps employees plan their tax liabilities in advance when receiving a lump-sum gratuity.

Disclaimer

The information provided above is for informational purposes only and is not promotional content. It does not constitute financial advice and should not be considered a recommendation for any investment or spending decisions. Neither the author nor Greynium Information Technologies shall be held liable for any losses incurred as a result of decisions based on this write-up.