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    How to calculate gratuity

    Synopsis

    As per the law, the gratuity payable by an employer to the employee is calculated using a formula. Remember, the gratuity is payable only if an employee leaves the job only after completing five years.

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    The Payment of Gratuity Act, 1972 has divided non-government employees into two categories.
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    Gratuity is given by the employer to his/her employee for the services rendered by him/her during the period of employment. It is usually paid at the time of retirement but can be paid earlier, provided certain conditions are met.

    A person is eligible to receive gratuity only if he has completed minimum five years of service with an organisation. However, it can be paid before the completion of five years at the death of an employee or if he has become disabled due to an accident or disease.

    There is no set percentage stipulated by law for the amount of gratuity an employee is supposed to receive- an employer can use a formula-based approach or even pay higher than that. Gratuity payable depends on two factors: last drawn salary and number of years of service. To calculate how much gratuity is payable, the Payment of Gratuity Act, 1972 has divided non-government employees into two categories:

    a) Employees covered under the Act
    b) Employees not covered under the Act

    An employee will be covered under the Act if the organisation employs at least 10 persons on a single day in the preceding 12 months. Once an organisation comes under the purview of the Gratuity Act, it will always remain covered even if the total number of employees falls below 10.

    Calculation of gratuity
    a) For employees covered under the Act
    There is a formula using which the amount of gratuity payable is calculated. The formula is based on 15 days of last drawn salary for each completed year of service or part of thereof in excess of six months.

    The formula is as follows:
    (15 X last drawn salary X tenure of working) divided by 26

    Here, last drawn salary means basic salary, dearness allowance and commission received on sales.

    Suppose A's last drawn basic pay is Rs 60,000 per month and he has worked with XYZ Ltd for 20 years and 7 months. In this case, using the formula above, gratuity will be calculated as:
    (15 X 60,000 X 21)/26 = Rs. 7.26 lakh

    In the above case, we have taken 21 years as tenure of service because A has worked for more than 6 months in year. Had he worked for 20 years and 5 months, 20 years of service would have been taken into account while calculating the gratuity amount.

    b) For employees not covered under the Act
    There is no law that restricts an employer from paying gratuity to his employees even if the organisation is not covered under the Act.

    The amount of gratuity payable to the employee can be calculated based on half month's salary for each completed year. Here also salary is inclusive of basic, dearness allowance, and commission based on sales.

    The formula is as follows:
    (15 X last drawn salary X tenure of working) divided by 30

    In the above mentioned example, if A's organisation was not covered under the Act, then his gratuity will be calculated as:
    (15 X 60,000 X 20) /30 = Rs 6 lakh

    Here the number of years of service is taken on the basis of each completed year. So, since A has worked with the company for 20 years and 7 months, his tenure will be taken as 20 and not 21.

    As per the government's pensioners' portal website, retirement gratuity is calculated like this: one-fourth of a month's basic pay plus dearness allowance drawn before retirement for each completed six monthly period of a qualifying service. The retirement gratuity payable is 16 times the basic pay subject to maximum of Rs 20 lakh.

    In case of death of an employee, the gratuity is paid based on the length of service, where the maximum benefit is restricted to Rs 20 lakh.
    Qualifying service Rate
    Less than one year 2 times of basic pay
    One year or more but less than 5 years 6 times of basic pay
    5 years or more but less than 11 years 12 times of basic pay
    11 years or more but less than 20 years 20 times of basic pay
    20 years or more Half of emoluments (salary) for every completed 6 monthly period subject to maximum of 33 times of emoluments


    1. When is an individual eligible to receive gratuity?
      An individual is eligible to receive the gratuity once he/she has completed five years of service with an employer.
    2. While calculating gratuity, what is considered as salary?
      To calculate the gratuity amount you are eligible to receive, the last drawn salary will be considered. The last drawn salary includes basic salary, dearness allowance, commission received on sales.
    3. How much gratuity is tax exempt?
      The maximum gratuity amount that is tax exempt is applicable to a person's entire career. What this means is that during your entire working life, the tax-exempted gratuity amount you can claim cannot exceed Rs 20 lakh currently in total from one or more employers.
    4. On what factors are used to calculate gratuity?
      Gratuity is calculated on the basis of last drawn salary and years of service.
    ( Originally published on Dec 04, 2017 )
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    28 Comments on this Story

    Ankit Nayak59 days ago
    Sir mere pita ji nagariya nikai Mai the or unhone 33 year ki service Puri kar ki hai or ab unki death.ho hai hai unki gratuity ki gadna kis prakar hogi.plz batai
    MITUL68 days ago
    I have completed 8.5 years as an Assistant Professor in Private College. The Educational Institute college is established since 2008. Also, I have resigned from the job so what gratuity i would be getting. Also, If the college is not giving gratuity then what should i do?
    Muralidhar Shenoy S105 days ago
    Whether notional HRA is considered for calculation of gratuivity
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