How to Calculate the Gratuity in the Salary?
The calculation of gratuity involves a specific formula outlined in the Payment of Gratuity Act. The formula is as follows:
Gratuity = [Last Drawn Salary * 15/26] * Completed Years of Service
Here, the last drawn salary refers to the monthly sum of the basic salary and dearness allowance. Commission on sales, if it is a fixed component of monthly earnings, may also be included. Other allowances, such as HRA or bonus, are not considered in the gratuity calculation.
For example, if an employee's basic salary is ₹40,000 and the dearness allowance is ₹5,000, and they have completed 15 years of service, the gratuity amount is calculated as:
[(40,000+5,000) * 15/26] * 15= ₹3,89,423 (approximately)
A few points that must be kept in mind while doing this calculation are:
The maximum tax-exempt gratuity amount under the Income Tax Act is ₹20 lakhs. While employers can pay a higher amount, any gratuity received beyond this limit is taxable as per the employee’s applicable income tax slab.
The fraction of a year will be rounded off to the nearest whole number. For instance, if the service tenure is 10 years and 7 months, it will be rounded to 11 years. On the other hand, if the fraction is less than 6 months, say, 10 years 4 months, the employee will receive a gratuity for 10 years.
In cases where an employer is not covered under the Payment of Gratuity Act, gratuity may still be paid at the employer’s discretion as a gesture of goodwill. However, the calculation uses a different method based on 30 days rather than the standard 26 days. The gratuity amount in such a case is calculated using the formula below:
Gratuity = [Last Drawn Salary * 15/30] * Number of Completed Years of Service
