How Is Gratuity Calculated? A Simple Breakdown with Examples for Better Understanding

Understanding Gratuity Calculation

Hello, I can certainly help explain gratuity calculation with an illustration. Let me break it down for you.

Gratuity is a benefit provided by an employer to an employee as a token of appreciation for the services rendered. It is usually calculated based on the employee's last drawn salary and the number of years of service completed.

Formula for Gratuity Calculation

The formula to calculate gratuity is: (Last drawn salary * 15 days * number of years of service) / 26.

For example, if an employee's last drawn salary is $50,000 and they have worked for 10 years, the gratuity amount would be: (50,000 * 15 * 10) / 26 = $288,461.54.

I hope this illustration helps you understand how gratuity is calculated. If you have any further questions, feel free to ask.

Gratuity Calculation Example

Gratuity = Basic Salary * 15/26 * number of years served for the organization (greater than or equal to 5 years).

Example - 1) One employee worked 6 years for an organization. His gross salary is Rs. 22,000, and the basic salary is Rs. 13,000. Then his gratuity amount is as follows:
Gratuity = 13,000 * 15/26 * 6
Gratuity = 45,000/-

If there are any mistakes, please update me.

Regards,
Mahmood.

Calculation of Gratuity

Calculation: W x Y x 15/26

where,

- W = Last wage drawn, i.e., basic + DA (monthly)
- Y = Number of completed years of continuous service (six months or less to be ignored and more than six months to be counted as a full year).
- 15 = 15 days' salary
- 26 = Number of working days in a month.

Thanks & Regards,

Snigdha

Gratuity will be calculated on Basic + DA x 15 days Salary (Half Month Salary) / no. of working days in a month (i.e., 26 days) x no. of years (number of years of service rendered in that organization). In some organizations, they won't show DA separately. It will be included in the Basic salary, so we can consider only the Basic Salary.

Make sure that gratuity will be eligible for those who have completed 5 years of service or more, not less than that. However, in a few organizations, they may consider and provide gratuity when an individual completes 4 years and 8 months of service. This is dependent on the organization; not all organizations follow this practice.

Thanks and Regards,
Nirmala

I also want to know if an employee passed away before completing 5 years of service in that organization, does gratuity still stand valid for that employee? Secondly, if the employee passed away after completing 5 years, will the calculation remain the same or will any bonus factor come into play?

Regards,
Pampa

Gratuity Calculation

= Basic x 15 days x years / 26 days

Suppose the Basic is 10,000 and the employee has completed 7 years, so we give him = 10,000 x 15 x 7 / 26 = 40,385.00

Regards,
Rajeev Kumar

Update on Gratuity Eligibility

An employee will be entitled to gratuity benefits if he/she has completed a minimum of 4 years, 10 months, and 18 days of continuous service in a company. This was established by the Madras High Court in the case of Mettur Beardsell Ltd Vs. Regional Labour Commissioner (Appellate Authority under the Gratuity Act). Kindly correct me if I am wrong.

Gratuity Eligibility and Exceptions

Gratuity will be eligible for those who have completed 5 years of service or more. However, if an employee expires or becomes permanently disabled, what is the minimum number of years of service that is compulsory?

Thank you.

Eligibility for Gratuity

If an employee was on contract, in any case, he will not be eligible for gratuity. This gratuity is applicable only if he is a permanent employee. In the case of Meena, his period of service is taken as 4 years and not 5 years.

What happens if a person is on leave for 6 months? Will they be eligible for gratuity?

Yeah, the aforesaid calculations are correct. Five years of continuous service in an organization is mandatory to be eligible for Gratuity. The calculation is as follows: Last drawn Basic + DA * years of service * 15/26.

Regards,
Kannan R

It's good to see that lots of users are giving their ideas on the aforementioned problem. I really appreciate that, but no one has reached a solution for the particular query of what happens if an employee expires after 5 years of consecutive service in the organization.

Solution for Gratuity Payment in Case of Employee's Death

Here is the solution: the nominee can collect the gratuity payment as mentioned in Form F. To change the nomination, the employee must fill out Form H (Modification of Nomination) during service. If the employee nominee needs to claim the gratuity payment in case of their death, the nominee must fill out Form J. For claiming the gratuity payment by a legal heir, Form K will be used.

For more information regarding the gratuity rules and forms, I am enclosing the Gratuity Act.

Hopefully, you will appreciate it.

Thanks

Gratuity Calculation Explained

For gratuity calculation: current basic * 15/26 * number of years. For example, if the current basic at the time of leaving the service is 12,000 * 15/26 * service period is a minimum of 5 years = 34,615.

Gratuity will be paid only if the employee has worked for more than 5 years. Only in the case of death, an employee who has served more than 6 months will be eligible for gratuity payment. If the deceased employee served for more than 180 days in the year, they will be eligible for 1 year of gratuity.

Gratuity will be calculated as follows: Last drawn (Basic + DA) / 26 * 15 * Number of years. For example, if Basic + DA = 10,000 and the number of years is 10, the calculation would be 10,000 / 26 * 15 * 10 = 57,692/-. If the same employee works for 10 years & 7 months, the gratuity will be calculated for 11 years, and if less than 10.6 years, it will be considered as 10 years only. The gratuity amount should not exceed more than 10 Lakhs.

If any person works for 7 months and then expires, as per the aforementioned discussion, he is eligible to receive 1 year of gratuity. His basic salary was $8500. How can I calculate this?

Please calculate as follows:

Gratuity Calculation

Gratuity = 8500/26 * 15 * 1 (since more than 180 days it is calculated as 1 year) = 4904/-

Whatever the case may be, if he has served more than 180 days in the current year, it is calculated for 1 year only.

Normally, gratuity calculation occurs after the completion of 5 years, and the calculation depends on three conditions:

1. Last drawn salary (average of 10 months) - where salary means Basic + DA.
2. 15/26 of the basic salary multiplied by completed years.
3. Payment of Gratuity Act 1972 Rs 3.5 lakhs.

Whichever amount is least is exempted under the Income Tax Act. Every company must follow the same rules. A provision is created for the employee from the date of joining onward.

Required Fields for Gratuity Calculation

- Employee ID
- Employee Name
- Basic
- DA
- Date of Birth
- Date of Joining

Thanks,

Suresh