Understanding Gratuity Calculations: Why 4.83% is More Accurate Than 4.16%

Hello friends,

It might be useful for you to calculate Gratuity while working out CTC. Until now, we have been calculating gratuity at 4.16%, assuming a month is comprised of 26 working days and not 30 days when calculating Gratuity.

Gratuity should be calculated at 4.16% or 4.83%.

Logic behind 4.16%:

- 15 days' salary for 1 year
- 0.5 months' salary for 1 year
- 0.5 * 5 = 2.5 months' salary for 5 years
- 2.5 months' salary for 60 months (12 x 5)

Now, how much is 2.5 as a percentage of 60?

2.5 x 100 / 60 = 4.16%

So, gratuity is payable at 4.16%, which is the wrong calculation. The correct calculation is as follows:

Logic behind 4.83%:

- 15 days' salary for 1 year
- A month is comprised of 26 working days, not 30 days
- It means 57.69% of the monthly basic is payable (15 x 100 / 26)
- 0.58 months' basic for 1 year
- 0.58 * 5 months' basic for 5 years
- 2.9 months' basic for 60 months (12 x 5)

Now, how much is 2.9 as a percentage of 60?

2.9 x 100 / 60 = 4.83%

Hence, gratuity should be calculated at 4.83% and not 4.16%.

Amit Goyal

Dear Amit,

The correct way to calculate the gratuity is as per the following formula:

15/26 x GS x SER

Gratuity Salary (GS): Last drawn basic salary including dearness allowance (if any).

Gratuity Service (SER): Completed years of Continuous Service with part thereof in excess of six months.

Regards,

Naresh Taneja

Hi Naresh,

You are absolutely right. This is how we calculate the gratuity amount when an employee leaves the organization after working for at least 5 years.

However, how would you calculate the gratuity when determining the monthly CTC of an employee upon joining the organization? I applied the same formula you recommended, but for calculating the monthly CTC, not the consolidated gratuity amount. It seems there might have been a misunderstanding.

Amit Goyal

Hi Amit,

When you intend to show the Gratuity Amount as a part of CTC of an employee at the time of joining, then in my view, you cannot do the calculation based on 60 months. If you do, you are implying that the new joiner will not receive any salary increments for the next 5 years! Moreover, if the employee leaves after 60 months, you will have to calculate their gratuity based on the Last Salary Drawn. Therefore, to keep the matter simple and logical, we should calculate the gratuity as 4.16% of the salary being offered at the time of joining.

Please let me know your comments.

Regards,
Naresh Taneja

Dear Amit,

Since in your original post you had mentioned the figure of 4.16, I referred to that. Otherwise, if one calculates the Gratuity as I had suggested, it would work out to 4.8%. I have made a sample CTC and its breakup and attaching the same for your info, please. One may modify it to add other provisions for maximizing Income Tax rebates.

Regards,
Naresh Taneja

If the person leaves after 7 years, how will the gratuity be calculated? Will it be based on the current salary structure or accumulated over the 7-year period?

May I raise the question that gratuity is given after retirement, so what sort of contribution does this make to the CTC as it is deducted from the gross? What are the requirements to deduct, as we contribute to the PF, so is the gratuity also contributed? I'm confused because I provide a plain salary structure which includes basic, HRA, conv., special allowance, that's it.

Mr. Indu Patel,

Gratuity amount can be claimed anytime after completing 5 years of experience in an organization. It is not dependent on retirement.

Regards,
Viswanath

Can any employer refuse the gratuity act by giving the same amount that they have deducted from CTC as gratuity contribution during the whole service.

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In general, an employer cannot refuse to pay gratuity as it is a statutory benefit provided to employees upon meeting certain conditions. The gratuity amount should be paid by the employer as a token of appreciation for the services rendered by the employee over the years. If an employer deducts a certain amount from the CTC as gratuity contribution, they are still obligated to pay the gratuity as per the Gratuity Act rules and regulations. It is not permissible for the employer to withhold or refuse to pay gratuity by merely offsetting the deducted amount.

Dear Naresh,

I have a question regarding gratuity entitlement after completing 5 years of continuous service. Is it mandatory for the employer to pay gratuity to an employee for the next continuous service once the employee has claimed it after completing the first 5 years of service?

Regards,

Suman A.V.K

How would Gratuity be calculated? If the Monthly Basic is 16960.00 and the number of years of service is 12 years. According to the formula:

1. GS = (16960 + DA)
2. GSER = 12 X 12

So Gratuity should be = 15/26 * (16960 + DA) * 12 * 12

Would like to know whether I am on the right track.

Regards,
BeekayrDG

Dear Vinayak,

Gratuity %: 4.81%:

(15/26 * 1 year / 12 months * 100) p.m calculation on Basic + D.A.

Regards,
S.V

It's 4.81%.

Example - The formula is (Basic + DA / 26) * 15 * No. of completed years of services. If basic + DA is 5000 and we calculate the gratuity for 1 year, then (5000 / 26) * 15 * 1 = 2884.61. Now we will calculate on a per month basis: 2884.61 / 12 = 240.38. Now we calculate the percentage: 240.38 / 5000 * 100 = 4.8076, which means 4.81%.

My father passed away during his service period after providing 43 years of service in an organization due to cancer. His last drawn salary was $7500 per month. Please calculate his gratuity amount. Is there a maximum service length beyond which he is not entitled to receive gratuity?