What Is Gratuity in Salary?

What Is the Meaning of Gratuity?

How Does Gratuity in Salary Work?

What Is the Eligibility Criteria for Gratuity?

How to Calculate Gratuity in Salary?

 

Employers use a straightforward formula for the calculation of gratuity. This is –

Gratuity = N*B* 15/26

Where,

N

Number of years an employee has worked in a single organisation

B

Last basic salary, including the DA

Example of Calculating Gratuity in Salary

 

For your better understanding, we have shown an example of how to calculate the gratuity below.

Parameters

Value

N (Number of years an employee has worked in a single organisation)

10 years

B (Last basic salary, including the DA)

₹ 20,000

Gratuity = 10* 20,000 *15/26

₹ 1,15,385

If the final gratuity eligibility period is less than 6 months, then the number of years is rounded off to a lower value. If the number of months is greater than 6 years, then the number of years is rounded up to the next higher value.

How to Calculate Gratuity for Employees Not Covered Under the Gratuity Act 1972?

 

There are some cases whereby an employee can receive gratuity from an employer even if an organisation is not a part of the Gratuity Act. Here is how you can calculate the compensation for those cases.

Gratuity is based on a half month's salary and includes components such as -

1. Dearness allowance

2. Basic salary

3. Commission (sales-based)

 Further, we have shown the formula below –

Gratuity = (15*L*P)/30

Where,

P

Period of service

L

Last basic salary

In this case, if the final service period is less than 6 months, the duration will be rounded off to the lower year and if the course is greater than 6 months, then round up one year.
 
For your convenience, we have shown a table below with an example.

Example of Calculating Gratuity in Salary for Employees Not Covered in the Gratuity Act 1972

Parameters

Value

P (Period of service)

Last basic salary10 years and 9 months

L (Last basic salary)

₹ 50,000

Gratuity = (15* 50,000*11)/30

₹ 2,75,000

How to Calculate Gratuity in Salary in Case of Death of an Employee?

 

In the case of an employee's death, you can calculate gratuity in the following way, according to their service period -

Tenure of Service

Gratuity in Salary

< 1 year

2 * basic salary

1 < = Tenure of service < 5 years

6 * basic salary

5 < = Tenure of service < 11 years

12 * basic salary

11 < = Tenure of service < 20 years

20 * basic salary

Tenure of service < 20 years

Half of the basic salary for each six months, subject to a maximum of 33 times of the basic salary.

What Are the Latest Advancements Concerning Gratuity in Salary?

What Is the Taxation Policy for Gratuity?

Are There Any Exemptions Available on Gratuity?

For example, Ms Aditi Saxena has worked for 15 years and 5 months, with a monthly basic pay plus dearness allowance salary of ₹ 20,000 and a total compensation of ₹ 40,000.

Under the Gratuity Act 1972, she is exempt from paying the least of these amounts.

Case 1:

(15/26) * ₹ 40,0000 * 15 years

₹ 3,46,153.85

Case 2:

₹ 10 lakhs

₹ 10 lakhs

Case 3:

Actual gratuity received = (15/26) * 15 * ₹ 20,000

₹ 1,73,076.92

So, as can be seen, the exemption will be the least of the three, which is ₹1,73,076.92.

 

 

3. The following rules apply for tax exemption for those who are not under the Gratuity Act of 1972 -

 

  • Half month's average salary * completed years of service

  • ₹ 10 lakhs

  • Actual gratuity received

Below is an example to help demonstrate the above criteria.

Case 1:

(1/2) * ₹ 20,000 * 15

₹ 1,50,000

Case 2:

₹ 10 lakhs

₹ 10 lakhs

Case 3:

Actual gratuity received = (15/26) * 15 * ₹ 20,000

₹ 1,73,076.92

Hence, in this case, the exemption will be as per the least of the above points, which is ₹ 1,50,000.

What Are the Important Rules for Gratuity?

How to Withdraw Gratuity?

Frequently Asked Questions