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What is Gratuity in Salary? How is it calculated?


Gratuity comes in the form of a lump sum payment which is made by the employers to their employees for their services provided. However, there are many eligibility criteria for the same, and the amount that an employee receives is based on that criteria. Gratuity is one of the various components that is included in the gross salary of an employee.

There are two ways in which employers pay the gratuity amount to their employees, they accumulate the amount in their own account and pay for the gratuity amount, or they opt for a general gratuity insurance plan with an insurance company that pays to the employee after all the policy rules and regulations are followed. The amount does not include any contribution from the employee, and the total amount is paid by the employers solely.

There are certain eligibility criteria that entitle employees to gratuity like they should have put in at least five years at work, retire after completing their total years of service or pass away due to unexpected illness or suffering from any disability.

A manual gratuity calculator can be used via a simple mathematical formula to calculate the gratuity amount, or one can use an online gratuity calculator to estimate the amount.

Here is the gratuity formula that can be calculated manually:

Gratuity Amount = Y x S x 15/26

Here, Y is the number of years an employee has worked in the company, and S is the last drawn salary, including DA.

For example, if an employee has been working for a company for 6 years and the last drawn basic salary including DA is INR 25,000, then the gratuity amount will be:

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Gratuity Amount = 6 x 25000 x 15/26 = INR 86,539.

The maximum amount (tax-free) that can be disbursed as the gratuity amount is Rs. 10 lakhs, and any amount above that is considered as ex-gratia, that can be voluntarily contributed from the employer’s side. Also, if the number of months if exceeds ahead of 6, the total will be rounded off to the next number and below 6 will be rounded off to the previous number.

For example An employee who has worked for 6 years and 7 months will be considered working for 7 years, whereas someone who has worked for 6 years and 4 months will be considered working for 6 years.


Donika Jonathan
My name is Donika and i am a professional blogger.I have searched out different niches and brought up with amazing results. My posts are on famous blogs like norstrats.net.

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