Gratuity Meaning and Eligibility Criteria | Gratuity Calculation

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Meaning of Gratuity

Gratuity calculation and provisions are covered under the Payment of Gratuity Act 1972. Gratuity is given by the employer to an employee for rendering services for completing 5 or more years of services during the employment. Besides that, there are a few more conditions to be eligible for gratuity benefits.

The amount of gratuity depends upon the number of years served in the company and the last salary drawn.

Let’s understand the gratuity eligibility criteria and how to calculate gratuity.

Gratuity Calculation Formula | E Tax Advisor

Eligibility criteria for payment of gratuity

To become eligible for gratuity, an employee must fulfill the following conditions:

  • Be eligible for superannuation
  • Have retired from services
  • Have completed continuous employment of 5 years with the company
  • In case of death or disablement (due to accident or sickness), the nominee is eligible for gratuity

Also read: How to withdraw PF without leaving a job?

How to calculate gratuity

The amount of gratuity is calculated based on the gratuity formula as below:

Gratuity formula: (15 * last drawn salary of employee * tenure of working) / 26

Calculate gratuity

Calculation of gratuity for the employees whose organization is covered under the Gratuity Act 

The gratuity formula shall be n*b*15 / 26

Where, n = Tenure of service completed in the company

b = Last drawn basic salary + dearness allowance (DA)

Note:

The gratuity amount cannot exceed Rs. 20 lakh. Any excess amount shall be treated as “ex-gratia.”

For calculating the number of years, if you have worked in the last year of employment for more than six months, then consider it to the nearest figure. For e.g., you have worked for 15 years and 8 months; then you will receive gratuity for 16 years. Otherwise, below 6 months, you will receive gratuity for 15 years.

Calculation of gratuity for the employees whose organization is NOT covered under the Gratuity Act 

The gratuity formula = (15 * your last drawn salary * the working tenure) / 30

Calculation of gratuity in case of death of an employee

The nominee of the employee is eligible to receive gratuity depending upon the employee service tenure. However, the amount shall not exceed Rs. 20 lakh. Here is the calculation of gratuity:

Tenure of serviceGratuity amount calculation
Less than a year2 * basis salary
1 year or more but less than 5 years6 * basic salary
5 years or more but less than 11 years12 * basic salary
11 years or more but less than 20 years20 * basic salary
20 years or moreHalf of the basic salary for each completed six-monthly period. However, it is subject to 33 times of the basic salary.

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