Understanding the 4.81% Gratuity Rate: Is It Fixed for All Companies or Are There Exceptions?

Dear All,

Kindly let me know the importance of 4.81% under the Gratuity Act. Please also clarify whether the 4.81% rate is fixed for all companies or if there are any exemptions.

Thank you,
Vadiraj Kulkarni

Dear Vadiraj,

There are many companies that include a 4.81% gratuity part (lump sum) in CTC. The gratuity formula is: Last basic + VDA * service in years * 15/26.

Suppose the basic including VDA is Rs. 10,000 and the length of service is 5 years. For example: 10,000 * 5 * 15/26 = 28,846.

At 4.81 per month, this would be 481 per month for 5 years, which equals 60 months: 481 * 60 = 28,860.

Regards,
A.K. Gautam
09669200408

Dear Gautam,

Thanks for your reply. Kindly let me know how you arrived at 4.81%. I want to know if this 4.81% is standard or if we need to calculate this figure based on other details like basic, DA, etc. If 4.81% is standard for everyone, could you please provide any references to the statutory compliance law books?

For example, one of our vendors has calculated the Gratuity employer contribution as follows:
"We arrived at 4.17% as shown below:
Eg: Let us assume the individual's Basic is Rs. 7000/-:
7000/12 (No. of Months) = 583.33/- (One Month Eligibility)
One Month Eligibility / Basic = 583.33/7000*100 = 8.33% (Per Month) / 2 (Gratuity is payable for 15 days in a year) = 4.165% (Rounded off to 4.2%)"

I would appreciate your clarification.

Thanks & Regards,
Vadiraj Kulkarni

8.33% per month is equivalent to 30.14 days on average (365/12). However, for gratuity calculations, only 26 days are to be considered. This difference in calculation results in a correct factor of 4.81%.

Dear All,

Gratuity is given to employees who have rendered their services to the organization. In lieu of their continuous service, this is given as a reward by the organization. It's a social security measure for the employees provided by the government through the organization. It is a kind of security at the time of retirement. In other countries, social security is very exhaustive. Since India has a United Family culture and still continues the same culture, post-retirement livelihood is secured and cared for by the United Family. However, in other countries, this is not in practice.

4.81% of the Basic Pay of individual employees is a provision made by the accounts department of the organization to ascertain the kind of liability. This is reflected in the PL A/c and Balance Sheet. Some organizations consider it as part of CTC. The 4.81% monthly calculation arrives as follows: 15 / (26 * 12 months)%. The maximum amount payable as per law is Rs 3,50,000/-, which is not taxable; beyond it is taxable. It is enforced by law. Otherwise, no organization wishes to pay such an amount without any contribution of service.

I believe this will suffice your requirements and address the inquiries.

V K Sharma, Tarapur

There is ONLY ONE METHOD for calculating Gratuity entitlement. It is as follows: Wages/26*15* No. of years of service.

Example:

Length of Service of Mr. A is 10 years. Basic + DA is Rs.10000/-. Gratuity will be calculated as follows: Rs.10000/26*15*10= Rs.57692.

Vasant Nair

Dear Vadiraj,

The Gratuity Act stipulates payment of 15 days' wages for each completed year of service. According to decisions by Courts (Ref. Laxmi Woollen Mills Case, and many others), 15 days' wages are not equal to half a month's wages. The Courts have specified that in order to arrive at one day's wage, you have to divide the monthly salary by 26. If you take the monthly salary, divide it by 26, and multiply by 15, the result would be 4.807% of the monthly salary. That is why the quick way of computing gratuity is to multiply the monthly salary by 4.81%.

Regards, Gerry

Mr. Vadiraj Kulkarni,

Gratuity is calculated as Last drawn Basic + DA * 15/26 * No. of years of service as it is directly calculated for the month as under as 4.81% 15/26 for a 1-year basis divided by 12 months for arriving one month gratuity i.e. 15/26 * 1/12 = 0.048076923, and for the percentage multiplied by 100, i.e., 4.807692308, and it is calculated as 4.81%. That is how we arrive at gratuity 4.81% for one month.

Regards,
S.V

Guys,

In fact, there is provision for gratuity when one leaves after completing five years of service. Companies have come up with a percentage such as 4.81%. I want to know if a person leaves the job within a year or two, is the deducted amount returned to the employee or not? I expect a clarification here, please.

Regards,
Rajeev Dixit

Dear Sir,

Please check this simple method:

(Basic + Da) / 26 * 15 / 12 = Monthly Gratuity

For example: 5000 / 26 * 15 / 12 = 240.50

You can cross-check:

5000 = 100%

? = 4.81%

5000 * 4.81 / 100 = 240.50

Regards,

D V Gosavi
Email: durg_gosavi@rediffmail.com

Dear Sir,

As per the act, eligibility for gratuity is a minimum of 5 years, and the calculation for gratuity entitlement is as follows: Basic + DA * 15 * Number of years of service / 26.

For example:
Basic = DA - Rs 8000/- (Last Month Drawn)
Number of years of service - 6 years

The gratuity payable amount is Rs 8000 * 15 * 6 / 26 = Rs 27,692.00.

Regards,
Ramu Hegde

Dear Rajeev,

Whether to compensate the gratuity within 5 years of service depends upon the company.

Hi Rajeev,

If an employee does not complete 5 years of service in a single organization and leaves his services within a 5-year period, then he is not liable to receive gratuity, and the employer is not liable to make gratuity payments.

Mohan Rao
Manager, HR

The salary for the purposes of Gratuity as per the Payment of Gratuity Act is the average Basic + DA paid during the last 10 months x 15 / 26 multiplied by the number of years of service.

Regards,
Guruprasanna B.K.

Dear Guruprasanna B.K.,

Please clarify whether you are informing us about the gratuity calculation method under The Payment Of Gratuity Act, 1972 or in any other scheme.

Regards,
R.N. Khola

Hi Guys, can anyone tell me why we consider only 4.81% for gratuity? Is there any calculation for that? The 4.81% is used to book the gratuity liability and to reflect the notional value for the liability to the company on account of gratuity. The idea of using 4.81% is to ascertain what the gratuity would be if any employee leaves.

Hello, Sir,

I would like to know when we calculate Gratuity, should we include VDA? (I'm calculating on Basic & DA). Kindly confirm.

Regards,
Sushil