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Taxable House Rent Allowance

₹ 5,000

40% of Basic Salary

₹ 20,000

HRA received

₹ 5,000

Excess of Rent paid over 10% of salary

₹ 5,000

The least of the above three is exempt from HRA

Amount of Exempted HRA

₹ 20,000

HRA chargeable to tax

₹ 5,000

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Gratuity is a monetary benefit paid by the employer of the organization to the employees as a form of gratitude for the services provided by the employees. It is usually paid to the employees to provide financial security during

- The time of retirement
- Resignation
- Completion of a fixed tenure of service
- Layoff/Termination

The catch is, gratuity is only paid to those employees who have completed more than 5 years of service in that particular organization and have valid EPF (Employee Provident Fund) contributions.

However, this 5-year period is not taken into account in case of the employee’s death or getting disabled due to accident or disease.

Gratuity is calculated for the employee’s last withdrawn salary and the number of years the employee has worked in an organization.

The Gratuity amount given to the employees by the employer is governed by the Payment of Gratuity Act, 1972 in India. This act applies to all organizations that employ 10 or more employees.

With the Payment of Gratuity Act, of 1972, every employee can raise a complaint to the Assistant Labour Commissioner. In the case of any disputes,

- An employee can raise a complaint if he/she feels the gratuity amount received is less than the eligible amount.
- The employee can raise a complaint if the employer fails/denies/delays paying the gratuity amount.

Gratuity calculation is simple and easy to understand with the gratuity formula. Pazcare’s online gratuity calculator uses the same formula to calculate the gratuity amount.

Gratuity, G = **N*B*15/26**

Where

N is the number of years you were working in that particular organization/tenure of continuous service in that organization

B is the sum of the last drawn basic salary plus the Dearness Allowance (DA)

This gratuity formula is used when

- The employees are covered under the Payment of Gratuity Act of 1972.
- The number of employees working in the organization is 10 or more.
- The last drawn salary is the basic salary plus the DA
- The number of years of service is rounded to the nearest number. For instance, if an employee has worked for 6 years and 6 months, then N is 7 (rounded off to the nearest number).

Let us calculate gratuity with an example under the following situations.

1. Gratuity calculation - when employees are covered under the act

Let us imagine Raghu has been working in the organization named XYZ for 6 years and 8 months. He wishes to switch his job and he applies for a resignation from the XYZ company. The basic salary plus DA he receives is ₹30,000.

Gratuity, G = N*B*15/26

Here,

N = 7 (rounded off)

B = 30,000

Hence, G = 7*30,000*15/26, which is ₹121,153.85So, Raghu should receive ₹121,153.85 as his gratuity amount from XYZ company.

2. Gratuity calculation - when employees are not covered under the act

Let us imagine Raj has been working in the organization named XYZ for 7 years and 8 months. The average salary drawn for the last 10 months including basic salary, DA and commissions is ₹90,000.

Gratuity, G = (15*average salary for last 10 months*N)/30

Average salary = 90,000

N = 7

Hence, G = (15*90,000*7)/30 which is ₹315,000So, Raj should receive ₹315,000 as his gratuity from the XYZ organization.

The gratuity amount paid to the employee by the employer is considered a part of the salary hence, it is taxable under the Income tax act of 1961.

However, there are certain exemptions on taxes for the gratuity received under certain conditions.

The gratuity paid to the employees are mandated by the Payment of Gratuity Act of 1972. Below are some of the gratuity rules governed by the same.

1. Organizations with 10 or more employees are liable to pay gratuity to their employees

Any organization with 10 or more employees registered in the last 12 months is liable to gratuity. In case the number of employees for that organization falls to less than 10, it still has to pay the gratuity as per the act.

2. Employees should work in the same organization for 5 years or more

Other than in special cases of disablement, 5 years of consecutive service is mandatory. To determine the 5-year calculation, organizations that don't entail underground work consider one year as consisting of 240 working days for their employees. However, for those employed in mines and similar industries, a year is calculated as 190 days.

3. Employers cannot deny paying gratuity during bankruptcy

In case a company/organization has declared bankruptcy, the employer cannot refuse to pay the gratuity on the grounds of same.

4. Gratuity can be cancelled on the grounds of valid reasons

An employer can refuse to pay gratuity on the grounds of reasons like employees' unethical/violent/behaviour.

If you are covered under the Gratuity Act of 1972, your gratuity amount will be calculated as per the Gratuity formula G = N*B*15/26. Here N, the number of years will be rounded off to the nearest whole number which is 7 years. B will be your basic pay plus the dearness allowance.

If you are covered under the Gratuity Act of 1972, the gratuity amount for private sector employees is also calculated based on the gratuity formula, G = N*B*15/26. Here N is the number of years the employee has worked for the private-sector employer and B is the basic salary+dearness allowance.

To calculate the gratuity, use the Gratuity formula, G = N*B*15/26, where N is the tenure of continuous service in that organization, B is the sum of the last drawn basic salary plus the Dearness Allowance (DA).

For example, assume you have worked 6 years in the organization, your last drawn basic salary is ₹20,000 and DA is ₹5000. Then gratuity G is 6*(20,000+5000)*15/26 is ₹86,538. You can use Pazcare’s Online Gratuity calculator to calculate your gratuity in India.

Gratuity, G = N*B*15/26. Here, N is the tenure of continuous service in that organization, and B is the last drawn basic salary + Dearness Allowance (DA). Here, 26 represents the estimated working days in a month, and 15 signifies half a month's salary. When we divide B by 26, we obtain the per day wage of the employee. This per day wage multiplied by 15 gives half a month’s salary. When this is multiplied by N, we get the actual gratuity amount.

Yes, gratuity is calculated on the basic salary. Gratuity, G = N*B*15/26, where B is the sum of the last drawn basic salary and Dearness Allowance (DA).

Yes, gratuity is part of an employee’s CTC (Cost To Company) as per the Payment of Gratuity Act of 1972.