Gratuity - Check Eligibility, Formula and Calculation

 What is Gratuity?

Gratuity refers to an amount of money which an employer pays to his employees in return for services offered by him to the company. A person is eligible to receive gratuity only if he has completed five years of service with an organization.

Eligibility Criteria for Payment of Gratuity:-

An individual is eligible for gratuity if he/she fulfills the following criteria:-

1. The Employee should be eligible for superannuation.
2. He/she should have retired from the job.
3. An employee resigns after working for 5 years with a single employer.
4. In case of death ,or if someone become disabled on account of sickness or accident.

Gratuity Formula and Calculation:-

Listed below are the components that go into calculation of Gratuity amount. Amount also dependent upon the number of years served in the company and last drawn salary (Basic +DA)

                                                   Gratuity Amount= N*B*15/26

                                                                                N= No of years of service in company

                                                                                B= Last drawn Basic salary +Daily allowance (DA)

Example - For instance, the last drawn basic salary for Mr Arun is 40,000/Month and his employment with XYZ Company was for 26 years. In this case gratuity will be :- 

                                                  Gratuity Amount = 26*40000*15/26 = 6,00,000.

Gratuity for Employees not covered under Act:- For this category of employees ,following formula is used -

                                                  Gratuity Amount = 15*N*B/30

                                                                                 N= No of years of service in company

                                                                                 B= Last drawn Basic Salary + DA

Example - For Instance ,the last drawn basic salary for Mr Rahul is 30,000/month and his employment with ABC Company was for 25 years. In this case gratuity will be:-

                                                Gratuity Amount = 15*25*30,000/30 = 3,75,000.

In case of death of an employee ,the gratuity is paid based on the length of service, where the maximum benefit is restricted  to rs 20 lakh. Below is the criteria followed in case of death of an employee :-

         Qualifying Service                                                                                     Rate

1. Less than 1 year                                                                                     2 times of basic pay
2. 1 Year or more but less than 5 year                                                        6 times of basic pay
3. 5 Year or more but less than 11 year                                                      12 times of basic pay
4. 11 Year or more but less than 20 year                                                    20 times of basic pay
5. 20 Year or more                                                                                      Half of emoluments (Salary) for                                                                                                                            every completed 6 monthly period                                                                                                                        subject to max.of 33 times of                                                                                                                                emoluments