Home What is Gratuity, its Benefits and How to Calculate it?

What is Gratuity, its Benefits and How to Calculate it?


Derived from the word ‘Gratitude’, Gratuity is a token of appreciation from an employer to its employees who have served in the organization for a minimum of 5 years, thereby proving to be faithful and dedicated towards work. The extraordinary contribution of employees falling under this category is reciprocated by a cash prize reward. This amount is not deducted from the concerned employee’s salary, rather given as a gratuitous gift, entirely funded by the employer. Now the question is –
How is Gratuity Calculated?
There are several gratuity calculation formula to use while calculating the amount but the most authentic and widely accepted one is:

Gratuity = 15 / 26 * (A * B)


A = Last Drawn Salary of the Employee + Dearness Allowance

B = Total No. of Years of Service

‘*’ = Product or Multiplication

Having understood the meaning and calculation method of Gratuity, let us walk through some of the major advantages that this reward/ benefits scheme holds for working professionals:
Benefits of Gratuity

  • The only eligibility and applicability of availing Gratuity is that the employee works with a single organization for 5 years or more and the organization has over 10 working employees
  • The companies registering for Gratuity just have to be covered under the Payment of Gratuity Act, 1972 or they can voluntarily opt for offering the same
  • In case of death/ permanent disability or other unavoidable circumstances, employees have the power to transfer the Gratuity fund to their legal heir, else they can name a nominee for receiving the amount on their behalf later on
  • The eligible employee can get a maximum of INR 20 lakhs as the Gratuity amount
  • The amount won by an employee through the Gratuity Benefits Scheme is absolutely exempt from tax for government employees in case they withdraw the same on retirement
  • The payment of Gratuity by a company does not depend on the profit or loss faced, the employers are bound to give the amount once committed
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The gratuity amount depends upon the tenure of service and last drawn salary. It is calculated according to this formula: Last drawn salary (basic salary plus dearness allowance) X number of completed years of service X 15/26.

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