What is Gratuity?
Gratuity is a lump sum your employer pays you as a thank-you for long service. It is paid when you resign, retire or are laid off, as long as you have worked with the same employer for at least 5 years in a row.
It is paid entirely by your employer; nothing is deducted from your salary for it. In case of death or disability, it is paid even if you haven’t completed 5 years.
Gratuity is governed by the Payment of Gratuity Act, now part of the Code on Social Security, and applies to organisations with 10 or more employees.
Good to know
Under the new labour codes, fixed-term employees become eligible for gratuity after just 1 year of service, instead of 5.
What is a Gratuity Calculator?
A gratuity calculator works out how much gratuity you will receive, based on your last drawn monthly salary (basic + DA) and the number of years you have worked with your employer.
Why you should use a Gratuity Calculator?
- Know what you are owed: Check the amount your employer should pay you when you leave.
- Plan a job change: See how much gratuity you would give up by leaving just before completing 5 years.
- Plan your retirement: Include your gratuity in your retirement savings when you plan.
How Does a Gratuity Calculator Work?
The gratuity calculator works on the following inputs:
- Monthly salary (Basic + DA): Your last drawn basic salary plus dearness allowance. Other allowances are not counted.
- Years Of Service: The number of years you have worked with the employer.
The calculator relies on the following formula:
Gratuity = Monthly Salary × 15 × Years Of Service ÷ 26
- Monthly Salary
- Last drawn basic salary + dearness allowance
- 15
- 15 days’ wages for every year of service
- 26
- Working days in a month
A part year of more than 6 months counts as a full year. For example, 7 years and 8 months counts as 8 years, but 7 years and 4 months counts as 7.
Formula to Calculate Gratuity with an Example
Consider an example for a better understanding.
- Monthly salary (Basic + DA): ₹40,000
- Years Of Service: 12 years
Using the formula:
Gratuity = 40,000 × 15 × 12 ÷ 26
After calculation, the gratuity payable is ₹2,76,923.
Things to keep in mind
- ₹20 lakh limit: The law requires gratuity of up to ₹20,00,000. Your employer can choose to pay more.
- Tax: For private sector employees, gratuity up to ₹20,00,000 over your whole career is tax-free. Government employees’ gratuity is fully tax-free.
- Not covered by the Act?: If your employer isn’t covered by the Act, gratuity, if paid, is worked out on half a month’s salary for every completed year instead.
- Paid within 30 days: Your employer must pay gratuity within 30 days of it becoming due, or pay interest on the delay.