Gratuity is a financial benefit provided to employees as a token of appreciation for their continuous service to an organization.This article will outline the complete formula to calculate gratuity and provide examples to illustrate the calculation.
Gratuity Calculation Formula
Gratuity is calculated based on the employee’s salary and the number of years they have worked for the organization. The formula to calculate gratuity is:
\[ \text{Gratuity} = \left( \text{Last drawn salary} \times \text{Years of service} \times 15 \right) / 26 \]
Here, the last drawn salary includes basic salary and dearness allowance. The factor 15 represents 15 days of salary for each year of service, and 26 is the number of working days in a month.
Eligibility for Gratuity
Employees are entitled to gratuity after completing five years of continuous service with the same employer. This ensures that the employee has contributed significantly to the organization, warranting this benefit.
Example Calculations
Example 1:
Years of Service 7 years
Last Drawn SalaryRs 50,000 per month
Using the formula:
\[ \text{Gratuity} = \left( 50,000 \times 7 \times 15 \right) / 26 = Rs 2,01,923 \]
Example 2
Last Drawn Salary Rs 75,000 per month
Using the formula:
\[ \text{Gratuity} = \left( 75,000 \times 10 \times 15 \right) / 26 = Rs 4,32,692 \]
Gratuity Benefits Beyond the Act
While the Payment of Gratuity Act, 1972, mandates gratuity for employees in companies covered under the Act, some companies outside its purview also provide gratuity benefits. These companies may follow their own policies and guidelines to offer gratuity, often aligning with or exceeding the statutory requirements.
Conclusion
Gratuity serves as a significant financial reward for employees who have dedicated several years to an organization. Understanding the calculation and eligibility criteria helps employees plan their long-term financial goals. By knowing the formula and the potential gratuity amount, employees can better appreciate the value of their tenure and loyalty to their employer.
