What is gratuity and how it is calculated?

What is gratuity and how it is calculatedWhat is gratuity and how it is calculated?

Gratuity is the form of gratitude provided to employees in monetary terms for services rendered to the company. It is the important form of social security benefit provided as per Gratuity Act. Employees would get benefitted through Gratuity when they stay longer period in a company. In this article I would detail about what is gratuity, who is eligble for gratuity payment, how it is computed and how gratuity is taxed.

Who is eligible for gratuity payment?

An employee is eligible for gratuity, if he/she has completed 5 years of complete service with the company. However in case an employee expires, this 5 years is relaxed and he would be paid for every 1 year completed service. Please note that company need to have at least 10 employees so that they can pay gratuity to eligible employees.

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When is gratuity payable or paid?

Eligible employees would be paid gratuity in case of resignation, retirement or superannuation or death.

How Gratuity is computed?

Gratuity is paid for 15 days of every completed year of employment after 5 years of service. If you have worked for more than 6 months in a year, it would be treated as 1 completed year. Means if you worked for 5 years 6 months, you are eligible for 6 years gratuity. However if you worked for 5 years 5 months, you are eligible only for 5 years gratuity. Below is the method of computation

  • Gratuity paid for 15 days for every completed year of service
  • Your last drawn basic salary + DA will only be considered for computation
  • Number of working days would be considered as 26.

                                    15 days x no. of years completed

Gratuity payable =      ——————————————-

                                                26 (working days)

e.g. if you have basic salary + DA as Rs 40,000 per month and you worked for 5 years 6 months which is equivalent to 6 years. Below is the computation of gratuity.

                   15 x Rs 40,000 x 6 (years)

Gratuity =    ——————————– = Rs 138,641

                                26

Tax treatment for gratuity income

For the purpose of gratuity taxation, employees are divided into 3 categories. Govt employees, other employees who are covered under payment of gratuity act and other employees who are not covered under payment of gratuity act.

a) Govt employees: Gratuity is fully exempted from tax for all Government employees.

b) Other employees who are covered under payment of gratuity act: Least of the following is exempted from income tax

  • 15 days of salary for every completed year of service (Including part there-of)
  • Rs 10 Lakhs
  • Actual gratuity received

Illustration: An individual who has Rs 40,000 as basic + DA per month and who has finished 5 years and 6 months would get gratuity Rs 40,000 x 6 x 15/26 = Rs 138,641

c) Other employees who are NOT covered under payment of gratuity act: Least of the following is exempted from income tax

  • Half month average salary for every completed year of service (average salary is arrived for the basic salary+ DA received in the last 10 months). Part of the year would be ignored
  • Rs 10 Lakhs
  • Actual gratuity received

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Illustration: An individual who has Rs 40,000 as basic + DA per month in the last 10 months and who has finished 5 years and 6 months would get gratuity Rs 40,000 x 5 x 15/26 = Rs 115,384

In case an employee has claimed gratuity exemption earlier, the amount would be reduced from current amount and maximum eligible exemption would be Rs 10 Lakhs only.

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Suresh
What is gratuity and how it is calculated

The Author

Suresh KP

Suresh KP i.e. me have written 1,800+ articles on this blog. I have done by B.Com from Osmania University and then MBA-Finance from Symbiosis University, Pune. I have over 20 years of experience in analyzing various investment options and money saving ideas. I love doing financial planning, Mutual Fund Analysis, Searching long term Stocks for wealth creation, IPOs, reviewing Insurance Products, analysing Health insurance Plans etc.

103 Comments

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  1. Sir, 

    I pay my employee a lump sum of Rs.35,000/- as take home salary.He is in service for 27yrs.How do I calculate gratuity payable.

    Kindly suggest.

    Regards

  2. hello,

    My employer has a different structure to calculate the gratuity. As per normal norms of a mandatory 5years completion, my employer considers gratuity from 3rd year onwards. It says "After 3rd year @15days for 3rd year, @22 days for 4th year , @30 days for =or>5years" in my CTC structure to calculate the gratuity. Here are my questions:

    1. Say, i leave my job in 4th year (4 years 1 month) how will the "15/26 " component in gratuity calculation restructure itself?

    2. as i understand, 15 is the number of days of last BASIC+DA and 26 is the number of days in a month (30 -4 paid working days), is this structure same for all the employees? What if i have a 5 day a week structure i.e saturdays and sundays off, will the 26 evaluate to 22 (30 – 8 paid days)?

    3. I dont have a DA component, what should i add to my basic? Is it the Basic+HRA+special_allowance ? or just the Basic ?

    Regards,

    Shubham

     

     

  3. hello sir my gross sallery is 25600/- & my joining date 01/06/2010 to till date. so my gratuity how many amount & plz tell confirm method

    1. For calculation of gratuity, you should to know your Basic+DA, because of, absense of it you can't able to calculate your Gratuity amount. Gratuity is applicable on BASIC+DA.

       

  4. You have completed 21 years of service. Gratuity will be Rs. 2,30,192/-.
    Calc : Rs. 19000 Basic x 15 Days x 21 Years / 26 Days ).

    I hope it will be helpful.

  5. Dear sir my joining date is 08/03/1996 and my last working day was 10/01/2017 last basic salary given by 19000/ sir pls. tell me how much gratuity amount

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