What is Gratuity Meaning | Calculation Formula of Gratuity in Salary

What is Gratuity Meaning

Gratuity refers to a lump sum amount which employer-paid to its employees for its services provided to the corporation for a certain period. It may be noted that, the generally gratuity paid to the employees who had completed their service of 05 years or more in the company. In simple words, it is the amount paid to employees by the employer for contributing service in a company for a long period. Employees require to pay the amount as per the rules of the Gratuity Act 1972.

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If the employer wishes to pay the amount of gratuity form his/her pocket or he/she has an option, take a group gratuity plan provider by the insurance corporation, for this employer required to pay an annual contribution to the insurance provider.

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Gratuity Act

The full name of the Gratuity Act is the Payment of Gratuity Act, 1972. The act came into existence in September 1972. The main aim of the act is to provide a financial advantage to those employees who have served their services to a single employee. The employers have followed all eligibility and other conditions as per the Gratuity Act rules.

Gratuity- Eligibility

  • Employers shall have to serve his/her services to a single employer, and the period of service must be more than 05 years.
  • Employees die or suffer disability due to illness or accident
  • Retired Employee
  • An employee should be eligible for superannuation

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Gratuity- Forfeiture

The employer has the complete right to forfeit the employee’s gratuity in some exceptional circumstances. Here are the reasons-

  • Violent behavior
  • Performed any unlawful activity
  • In case of any messy conduct
  • Any crime involving moral turpitude

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Gratuity Payment- If Employee Dies

If any of the employees pass away, then the employer is liable to pay the gratuity as stated in the below table.

Service TenureAmount to be Paid
In case of less than one yearTwo times the basic pay
In case of more than one year and less than five yearsSix times the basic pay
In case of more than five year and less than eleven yearsTwelve times the basic pay
In case of more than eleven years but less than twenty yearsTwenty times the basic pay
More than Twenty yearsHalf of the salary for every completed six monthly periods subject to a maximum of Thirty-Three times of the salary

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Calculation Formula of Gratuity in Salary

The gratuity amount will also be depending on the employees served a year, and last drawn salary also matter on calculating the same. Here is the gratuity formula-

Gratuity = Number of years of service in a company * Last drawn basic salary plus DA (B)*15/26


Deepak is an employee (Manager) in an SD corporation and served his service in the same corporation for the 20 years, and his last drawn salary was Rs.25,000 plus DA amount. So, the calculation of the gratuity will be.

Gratuity Amount for Deepak = 20*25,000*15/26 = Rs.2,88,461.54

Point to be noted that if the employer wishes to pay more gratuity to his/her employee, then he/she is free to perform the same. But as per the Gratuity Act gratuity amount cannot be more than Rs.10 lakh. If any of the employer pay exceed the amount, then that will be known as ex-gratia voluntary contribution, and that will not be imposed by law.

Note: While calculation the months for the gratuity, anything above 6 months will be rounded off to the next number and on the other side, anything below 6 months will be rounded off to the previous number. That is if the employee served for the 10 years 7 months, then that will be considered as 11 years and of the employee served for the 10 years 4 months that will be considered as 10 years.

Maximum Limit Of Gratuity

An employer can pay ex-gratia as voluntary contribution exceed any sum. But as per the Gratuity Act, 1972, the amount should not be more than Rs.20 lakh.

Type of EmployeeTax-free Gratuity Amount
Government Employees   Rs. 20 lakhs
Employees covered by the Payment of Gratuity Act, 1972
Employees covered by the Payment of Gratuity Act, 1972

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