What is gratuity? | How to calculate gratuity

Gratuity is one of the components of your salaried income which you will get at the time of retirement.

Recently limit of gratuity payment has been increased from Rs.10 lac to Rs.20 lac. This hike is a kind of good news for employees who are working in the non-government sector for more than 5 years in the same company.

Meaning of Gratuity

Gratuity is the reward given in the form of money by an employer to his employee for being Permanent to the company and completing 5 or more than 5 years of service in the same company.

In India, limit was Rs.10 Lac earlier but after implementation of the 7th pay increment of salary this limit has been increased from Rs.10 lac to Rs.20 lac.

How gratuity is calculated?

Once you complete 5 years of your service, gratuity will be calculated for 15 days per year of your employment. The total working days considered are 26. It will calculate the number of years of your employment.

While considering years of service if the time period is more than 6 months then it will be considered as 1 year. For example, if your service period is 5 years and 7 months then for gratuity calculation it will be taken as 6 years.

Below are the terms taken into consideration while calculating gratuity:

Last drawn salary including basic pay and dearness allowance.
No. of years of your employment.
Paid for 15 days per year of employment considering working days as 26.

The formula for calculating gratuity is given below.

Salary * Number of Years * 15/26

Salary = Monthly salary including only basic + Dearness

Number of years = Total Number of years in employment

15/26 = 15 days of salary considered for every 26 days of work

Example of gratuity calculation.

If you are working with a company from the last 5 years and 7 months and your salary is Rs.50,000 including DA. Then your Gratuity will be –

= 50000*6*15/26

= Rs.1,73,076.9

At what time gratuity is given?

When a person completes 5 or more years of his service in the same company then he is eligible to get gratuity.

The criteria for gratuity payment are given below.

Retirement of employee
When an employee resigns the job after completing 5 years.
In case of death or permanent disability because of an accident.

The criteria of completing 5 years of employment will be relaxed in case of death or permanent disability caused due to an accident. In this case, the employer will pay gratuity for 15/26 days of every completed year of service.

Companies are supposed to pay Gratuity?

The gratuity act was originally passed in 1972. This act covers all the workers or employee’s in various companies, factories, mines, etc. As per this act, all the companies who have at least 10 employees have to pay gratuity.

If a company has 10 employee’s though for a single day in a period of 12 months then the company is eligible for paying gratuity.

Who is eligible to get Gratuity?

The criteria for an employee to become eligible for Gratuity :

The employee should retire after completing 5 years of service in the same company.
Employee must resign after 5 years of service in the same company.
In case the Employee passed away or suffers from any kind of deficiency while he was still working.

Whereas as per the rule under section 4(2), 5 years doesn’t mean 365 days/ year. As per this rule, an employee who satisfies the criteria given below is eligible for Gratuity, the criteria are as –

The employee should work 240 days a year – if the company has 6 working days.
The employee should work 190 days a year – if the company has 5 working days

This rule is will not be applicable if the employee dies or becomes disable while he is still working. In that case, the company will provide Gratuity to such employee or the nominee. This are the rules for gratuity eligibility criteria.