Markets are closed for weekend.

Create an Account

Its Free and always will be!

Sign up or login with your social accounts

What is gratuity? Eligibility and calculation


Gratuity in its true essence is a retirement benefit. It is a monetary amount paid by employers to their employees at the end of the employees' service tenure at the workplace. Gratuity is partially tax-free and figures among one of the many perks paid out to employees upon retirement. It can be paid before retirement as well, but the employee has to satisfy certain requirements.  

Who is eligible? 

If you are employed at a factory, establishment, educational institution, oilfield, mine, port, plantation, railway, or shop that employs more than 10 people for at least 12 months before your date of achieving gratuity, you are eligible for this benefit. To earn this additional income, you must be employed with your employer for at least 5 years. Gratuity can be paid before the stipulated minimum period if the employee dies or becomes disabled.  

How does it work? 

Employers have a choice to pay the gratuity out of their own funds or they may approach an insurer to invest in a group gratuity policy. Opting for an insurer means that employers will have to pay yearly premiums towards the policy. In such a scenario, employees can also choose to invest in the gratuity fund, but it is purely optional as gratuity doesn't require any investment from the employees' side. The gratuity is paid out by the insurer based on the terms of the policy.  

When is it payable? 

You are required to complete 5 years of continuous service with the same company to be eligible for gratuity except in cases of death or disablement. It is paid in the following scenarios:  

  • On retirement 
  • On resignation or termination of employment (Gratuity can be rejected if the reason for termination was the misconduct of employee.) 
  • On death or disablement (In this case, the gratuity amount is paid out to the nominee.) 

How to calculate? 

The gratuity payable to employees depends mainly on two factors i.e. years of service and the last drawn salary. Employers can compute the amount in a formula-based way or even choose to pay a higher amount. The Gratuity Act of 1972 divides non-government employees into two categories to calculate the gratuity amount. 

  • Employees covered under the act: An employee is covered under the act if his/her organisation employs more than 10 people at least 12 months preceding the date on which the gratuity is expected to be paid.  

The gratuity for such employees is calculated based on the 15 days of last drawn salary for each year of the service tenure.  

The formula used is as follows:  

(15 X Last drawn salary X Service tenure)/26 

If the employee has worked more than 6 months in a year, it will be counted as one whole year. Salary, here, includes the basic salary, commission on sales and dearness allowance.  

For instance: If A has worked in a company for 12 years and 8 months with a salary of 50,000. A's gratuity will be: 

(15 X 50,000 X 13)/26 = Rs.3.75 lakh 

  • For employees not covered under the Gratuity Act: Since there is no law that restricts employers from paying gratuity to their employees, this retirement benefit can still be availed if the employers wish to provide it despite not being covered under the act. To compute the gratuity amount, the last drawn salary and service tenure are taken into account. The formula to calculate gratuity for employees not covered under the Gratuity Act is as follows:  

(15 X last drawn salary X Service tenure)/30 

Under this category, even if an employee has worked for more than six months in a given year, it won't be counted as a whole year. For instance, if B has worked for 20 years and 9 months, his/her tenure during calculation will be computed as 20 years and not 21 years. The salary here consists of the basic salary, dearness allowance and sales commissions.  

Gratuity amount for death and disablement 

In case of death or disablement of an employee, the gratuity paid is based on the following format: 

Years of service 

Gratuity amount 

Less than 1 year 

2 times of basic salary 

More than 1 year but less than 5 years 

6 times of basic salary 

More than 5 years but less than 11 years 

12 times of basic salary 

More than 11 years but less than 20 years 

20 times of basic salary 

20 years or more 

Half of salary for every 6-month period completed. (Maximum of 33 times of salary) 

The maximum benefit in such cases is restricted to Rs.20 lakh.  For more information about Gratuity Calculation, Rules, Eligibility and Formula click here.


Rate this blog entry:
Risk Management in Stock market
What is Sensex? How is Sensex calculated?

Popular Investing Books

Charles T. Munger
Peter Mallouk
Anurag Sharma
James J. Cramer
Charles D. Ellis
Jack D. Schwager

Search Blogs

Most Popular Authors

Top 100 Investment Blogs

 338 Investors Online.

Be a Smart & Well Informed Investor!
Join Today its Free.
Register or Login with just one Click using your Social Account