Understanding Gratuity Calculation: Can Someone Explain the Formula to Me?

Dear All,

I'm a growing HR professional. Kindly help me understand how Gratuity is calculated and what the formula is.

Thanks and Regards,
Suresh

Hi Suresh,

Gratuity is applicable to those employees who have completed continuous 5 or more years of service. They should have worked 240 days each year. Gratuity is payable at 15 days per every year of work. If an employee has worked more than 6 months, it is counted as a full year, but if it is less than 6 months, it is not included in the calculation.

The formula for calculating gratuity is: Gratuity = (Basic Salary / 26) * years of service * 15 days. For example, if Mr. X had been working for 8 years and 7 months before leaving the service, and his last basic salary was 6000/- per month, then the gratuity amount would be calculated as follows:

Gratuity amount = 6000 / 26 * 9 * 15
= 31154

Please let me know if you need any further clarification or assistance.

Dear Mayur Topiwala,

Please suggest how to calculate gratuity on a monthly basis.

Actually, I am working with a contractor, P.E. wants the gratuity amount paid with the salary on a monthly basis.

Regards,
Mukesh Sharma

Friend,

Gratuity is payable only after separation from employment following continuous service of more than 5 years. The rates of the last drawn Basic Pay + Dearness Allowance are to be considered for the calculation of Gratuity. When calculating the NOTIONAL burden of Gratuity, the rates of salaries (Basic Pay + Dearness Allowance only) of 'Eligible' employees are to be considered, and approximately 4.80% of the last drawn salary is the burden of Gratuity considered on a monthly basis. LIC of India has a policy covering the liability of Gratuity, and every employer is required to obtain that policy compulsorily. The premium of this policy is based on the 'Actuary valuation' of the Notional burden of Gratuity.

Hope this information satisfies your query.

V. K. Bhide

Dear Mayur Topiwala,

Please suggest to me how to calculate gratuity on a monthly basis. I am currently working with a contractor, and the Principal Employer wants the gratuity amount to be paid along with the monthly salary.

Regards,
Mukesh Sharma

Hi,

I understand that some companies are insisting on monthly payment of Gratuity (instead of payment during separation). This has a noble idea of paying the employee rather than the contractor, who may get the benefit as 5 years of service is nowadays uncommon.

Is anyone in this forum doing it? Can you send the details of such monthly payments? How is it arrived at and how the difference (if any) after 5 years will be reconciled and adjusted when actual separation takes place? Is it legally right to pay monthly as the word "Gratuity" loses its meaning and the employee, in most cases, will be a loser (if the change in the value of money, due to early payments, is not considered) as the salary levels are bound to increase over the years and legally eligible Gratuity payment considers the last drawn salaries?

Regards,
Sathish