Gratuity is a financial benefit extended to employees in recognition of their service and loyalty towards the organization. In India, the Payment of Gratuity Act, 1972 governs and ensures the payment of gratuity to employees who have worked in an organization for a minimum period of five years. It is a valuable retirement benefit offered by employers and serves as a monetary cushion for employees after they have completed their tenure with the company. This article will guide you step-by-step on how to calculate the gratuity in India.

Qualifying criteria for gratuity payment:

1. The employee must have worked with an organization for a continuous period of five years or more.

2. The employee must be eligible for superannuation or has retired.

3. The employee must have resigned after completing a tenure of five years.

4. The Payment of Gratuity Act, 1972 applies to any establishment employing ten or more persons during a financial year.

Calculation process:

Gratuity calculation primarily depends on three factors – Tenure (years), last drawn salary, and nature of employment (whether covered under the act or not). Let’s understand how these factors apply to the formulae for gratuity calculation.

For Covered under Payment of Gratuity Act:

Gratuity = (Last drawn basic salary + Dearness Allowance) x 15/26 x Number of completed years of service
For Not Covered under Payment of Gratuity Act:

Gratuity = (Last drawn basic salary + Dearness Allowance) x Number of completed years of service x ½
Step-by-step process:

1. Determine your status: Check whether you are covered under the Payment of Gratuity Act, 1972 or not.

2. Calculate your last drawn basic salary + dearness allowance: Add both amounts from your last payslip or pay statement to form the consolidated amount.

3. Count completed years of service: As per the Act, if an employee has worked for more than six months in a year, it is counted as a full year towards gratuity calculation.

4. Apply the appropriate formula:

a. If covered under the Act – Use the formula (Last drawn basic salary + Dearness Allowance) x 15/26 x Number of completed years of service.

b. If not covered under the Act – Use the formula (Last drawn basic salary + Dearness Allowance) x Number of completed years of service x ½.

5. Calculate your gratuity amount: Based on the obtained value in step 4, compute your gratuity amount.

Conclusion:

Understanding the process of calculating gratuity can help you gain a clear insight into the financial incentives awaiting you after completing your tenure with your employer. It is important to remember that gratuity is a crucial component of an employee’s financial security in the long run. Hence, being aware of your rights and eligibility to receive such benefits will aid you in planning for a smooth and secure future after retirement.