Gratuity Calculation - Check Eligibility, Meaning & Gratuity Formula

Besides the basic pay offered to employees, several other benefits are offered. The entire pay of an employee includes many financial components like basic salary, bonus, provident fund, and gratuity. Often, employees are confused with the different components of the salary. Employees must be aware of what pay they are receiving from the employer. 

Gratuity is an essential component of your salary. However, you must become eligible to receive gratuity from the employer. Gratuity is a sum of money offered by the employer in return for the services offered. Read on to understand more about gratuity in your salary. 

What is Gratuity in Salary?

Gratuity is a component of the salary offered by the employer. Gratuity recognises the services offered by an employee to a particular company. It is among the financial benefits offered to employees when they resign or retire from the company. It is not optional for employers in India. Gratuity is made compulsory for employers according to the Payment of Gratuity Act 1972. It is a type of benefit that can help an employee after his/her retirement. 

When an employee resigns or retires from a job, the employer thanks them for their services. Consider gratuity as a type of ‘thank you’ from the employer in form of money. Gratuity is not always offered after retirement. Sometimes, medical conditions might also make an employee eligible for gratuity. Gratuity is not offered every month or year to employees. It is a type of one-time payment from the employer. 

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Gratuity – Eligibility Criteria 

As discussed above, you must become eligible to receive gratuity from your employer. The eligibility conditions for gratuity in India are as follows: 

• Employees eligible for superannuation will receive gratuity 
• An employee can receive gratuity after retirement 
• An employee can receive a gratuity when resigning after working for a minimum of five years 
• The family members of an employee will receive gratuity after he/she passes away
• An employee is eligible for gratuity after suffering a disability due to an accident or a medical condition 

The above conditions apply to employers across the country. Both private and government employers offer gratuities to their employees. Some employers might have some special gratuity benefits for employees. 

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Gratuity Formula – How to Calculate Gratuity?

There is a pre-defined formula to calculate gratuity. Now, you can calculate the amount of gratuity you will receive from the employee at the end of your professional career. The formula for the calculation of gratuity is as follows: 

G = (N*S*15)/26

In the above formula: 

• G is gratuity 
• N is the number of years the employee has served in the company before retirement/resignation 
• S is the last salary received by the employee before retirement/resignation 

Let us understand the calculation of gratuity with an example. Let us say an employee has worked with a company for 15 years before retirement. Also, the last drawn salary of the employee is Rs. 20,000. In such a case, the gratuity amount for the employee will be calculated as follows: 

G = (N*S*15)/26 = (15*20,000*15)/26 = 1,73,076.92

As you can see, the employee will receive Rs. 1,73,076.92 in gratuity after ten years of service with the company. 

Some organisations in the country do not come under the Gratuity Act. However, employees that aren’t covered by the Gratuity Act also receive financial aid. For such employees, the formula for the calculation of gratuity is as follows: 

G = (N*S*15)/30 

It is important to note that if the employee resigns/retires after six months in the current year, the entire year is counted in the gratuity. However, if the number of months in the year of resignation/retirement is less than six, they aren’t counted for the calculation of gratuity. Let us say an employee is not covered under the Gratuity Act and retires after working ten years and four months. In such a case, only ten years of service will be considered for the calculation of gratuity. Let us say the last drawn salary is 25,000. The gratuity amount for the employee will be: 

G = (N*S*15)/30 = (10*25,000*15)/30 = 1,25,000 

As you can see, the gratuity amount for the above employee not covered by the Gratuity Act is Rs. 1.25 lakhs. The employer can also choose to pay more than the assigned gratuity to an employee. 

Gratuity Calculation – In Case of Death of an Employee 

In case of the death of an employee, the maximum gratuity paid by the employer is Rs. 20 lakhs. The rules for gratuity in case of the death of an employee are as follows: 

• Two times of basic salary after a year of service 
• Six times of basic salary for service between one and five years 
• 12 times the basic salary for service between five and eleven years
• 20 times the basic salary for service between eleven and twenty years 
• For service of more than 20 years, half of the basic salary for every six months of service (maximum of 33 times the basic salary). 

Different Types of Forms of Gratuity 

There are twelve different types of gratuity forms. These gratuity forms are I, J, K, F, G, H, L, M, N, O, P, and R. Every form has different uses concerning gratuity. 

Tax on Gratuity 

Government employees receiving gratuities are exempted from tax. For employees covered under the Gratuity Act, 15 days of last-drawn salary is exempted from tax. Some tax exemptions are also available for employees who aren’t covered by the Gratuity Act. 

Frequently Asked Questions

1. How is gratuity calculated for 2023?

For the calculation of gratuity, the formula is (number of years served * last-drawn salary * 15)/26. 

2. How is gratuity calculated in 5 years?

The formula for the calculation of gratuity in five years is (5 * last-drawn salary * 15)/26. 

3. How is 15 and 26 gratuity calculated?

The formula for gratuity is G = (N*S*15)/26. 15 and 26 are the two constants used in the formula for gratuity. 

4. Is gratuity paid for 4.5 years?

You will receive gratuity only after completing a minimum of five years in service. However, an employer can offer gratuity in 4.5 years due to the death of an employee.