Gratuity is a part of salary offered by an organization to an employee.  It is one of the retirement benefit offered to an employee, a lump sum that a company pays when an employee leaves an organization. In India, Gratuity is set out under the Payment of Gratuity Act, 1971. As per the Gratuity Act, It will be paid when an employee completes five or more than five years of service in an organization.

1. Any person employed on salary/wages (Also applicable for the part time or contract employees) 2. At the time of retirement 3. Resignation or on Superannuation 4. The completion of continuous service of five years shall not be necessary when an employee passes away or disabled due to accident or illness (In case of death, gratuity will be paid to the  nominee)



How to calculate your gratuity in India

If you are covered under the Payment of Gratuity Act, 1971, the gratuity amount will be calculated as follows:

  1. Employee’s are entitled to get the salary of 15 days for every completed years as gratuity.
  2. Only the basic pay and DA (if any) are considered while accounting for the salary. It means any bonus, special allowance and HRA are not taken for the gratuity calculation.


Gratuity calculation

Gratuity = (Salary / 26) x 15 x Number of years in service


Salary is “Last drawn basic pay + DA”

26 is the average working days in a month (As per Gratuity rules – 26 days not 30 days calculated)

15 is the actual days considered for gratuity in a year

Example of Gratuity Calculation

Tamil had been working with an organization for past 5 years, 9 months. Her current basic pay = Rs 15,000 pm, DA = Rs 3,000 pm. So what would be her gratuity


The last drawn salary of Tamil

= Basic salary + Dearness Allowance


= 15,000 + 3000


= 18,000


Years of Service

= 5 years 9 months


= 6 years



= (Salary / 26) x 15 x Number of years in service


= 18,000/26 * 15 * 6


= 62,308 (Total Gratuity)


Important points to remember

1. Nil tax for the Government employees on the gratuity amount.

3. For private sector employees, No tax on gratuity to a maximum of Rs 10 lakh.


If you have any doubts regarding YOUR Gratuity Calculation, kindly leave as comments. We would try our level best to address those.

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