Understanding Gratuity: How Do You Calculate It for Fair Employee Compensation?

Gratuity - Can anyone tell me the formula for gratuity payment?

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Gratuity is a benefit provided by employers to employees as a token of appreciation for their service. The formula for calculating gratuity payment varies depending on the country and the specific regulations in place. Generally, the formula includes factors such as the employee's tenure of service and the last drawn salary. It is important for employers to adhere to the legal requirements and accurately calculate gratuity to ensure fair compensation for employees.

Gratuity Formula is:

Last Basic Salary + DA earned / 26 * 15 * Number of years worked

The conditions are:

1) Minimum of 5 years of service
2) The above formula is for monthly salary employees

Also, please note that the gratuity amount for CTC is calculated as follows:
15/26 * 1 month basic salary = Annual gratuity to be deducted.

Whenever an employee is leaving the company after 5 years of service or has completed 5 years in the company, they are eligible for gratuity. Any amount greater than Rs. 360,000 is taxable.

Broadly, the amount of Gratuity payable is 15 days' wages for every year of service rendered. In terms of the formula, as already mentioned by our friends, it is: (Basic Pay + D.A) / 26 * 15 * length of service.

In PSUs as well as in government service, there is a ceiling on Gratuity payable, which is 3.5 lakhs. The minimum eligibility is 5 years of service.

Ashok

Gratuity is payable to eligible candidates only (there must be five years of continuous service). The amount paid is fifteen days' salary (last paid) for every completed year of service. If the period is six months or more, the next year is taken into consideration. For example, an employee whose wage is Rs. 3000 per month and has worked for 10 years and 7 months (having 5 years of continuous service), the gratuity amount will be:

= (15/26) * 3000 * 11

I hope this is clear to you.

N.K. Tiwari

Dear Ashok,

As mentioned by you, 15 days of wages are paid for every completed year. Could you please clarify whether this payment is based on basic wages or gross wages?

Raj.

Dear Raj,

The term "wages" has been defined under The Payment of Wages Act, 1972 in section 2(s) as all emoluments that are earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment and which are payable to him in cash. It includes dearness allowance but does not encompass any bonus, commission, HRA, overtime wages, or any other allowance.

From the above definition laid down in the Act, you will find that gratuity is not payable on gross pay because the wages under the Act have specifically excluded allowances that are an integral part of gross pay.

Ashok

Dear Raj,

To add to the long story and keep focused on your specific questions:

1) Whether Gratuity is payable on basic: the reply is basic plus D.A.

2) Whether Gratuity is payable on gross: the answer is again no for the reasons stated by me earlier.

I also find several informative postings on various aspects of this topic on cite HR. You may also go through and benefit from the same.

Ashok

Formula for Gratuity payment is:
Wage last drawn / 26 * 15 * No. of years of service completed.

Note:
1. Eligibility is completion of 5 years of service.
2. If a person worked for 5 years and 7 months (i.e., half a year or more), it should be taken as 6 years.
3. Gratuity payable to an employee shall not exceed Rs. 3,50,000/-

Helen