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Gratuity received at the time of retirement or change of job is a huge financial support for employees working in private or government sector. According to the ‘Payment of Gratuity Act, 1972’, when an employee completes at least 5 years of continuous service in an organization, a lump sum amount of gratuity is given by the organization as a mark of respect for his long and loyal service. Often, this question arises in the minds of employees that based on their current salary and service, how much total money will they get while leaving the company. If your last basic salary plus DA is ₹50,000 per month and you have worked in that company for 10 years, then you are going to get a substantial amount as gratuity. Let us know the official formula for calculating gratuity and its exact calculation.
For companies or factories that are covered under the gratuity law (i.e. where 10 or more employees are employed), a standard legal formula applies to decide gratuity. In this formula, instead of 30 days of the month, only 26 working days are calculated, because 4 Sundays in the month are considered holidays. At the same time, for every one year of service, the employee is given 15 days’ salary as gratuity.
The formula for gratuity calculation is as follows:
$$\text{Gratuity amount} = \frac{15 \times \text{Last Basic Pay + DA} \times \text{Total years of service}}{26}$$
The point to be noted here is that salary does not mean your ‘in-hand’ or ‘CTC’, but the last month’s salary as recorded in your salary slip. Basic Salary and Dearness Allowance (DA) Is. If you get any commission which is a fixed percentage on the sale, that also adds on; But HRA, special allowance or other allowances are not included in this.
Now let’s do step-by-step calculations based on your data:
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Final Pay (Basic Pay + Dearness Allowance): ₹50,000
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Total service period: 10 years
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Standard Ratio: 15/26
Substituting these values into the formula:
$$\text{Gratuity} = \frac{15 \times 50,000 \times 10}{26}$$
$$\text{Gratuity} = \frac{75,00,000}{26} \approx ₹2,88,461.53$$
That is, if your last basic salary is ₹ 50,000 and you have served the entire 10 years in the organization, then at the time of leaving the company or retirement, you will get ₹2,88,462 (approximately two lakh eighty-eight thousand rupees) The gratuity amount will be received in lump sum.
The Gratuity Law has a very useful rule of rounding off the months for the convenience of the employees. If an employee has worked for more than 6 months in the next year after completing 5 years, that additional time is considered as one full year:
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Example 1: If you have been in service for 10 years and 7 months, enter the number of service years directly into the formula instead of 10. 11 years Will be considered. In this situation the gratuity amount will increase to approximately ₹3,17,308 It will be done.
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Example 2: If your job has been for 10 years and 4 months, the reason for being less than 6 months is only 10 years Only Rs will be calculated and the amount will remain only Rs 2,88,462.
As per tax rules, on the entire amount you receive You will not have to pay a single rupee tax.
Lifetime maximum for private sector employees under section 10(10) of the Income Tax Act Gratuity up to ₹20 lakh is completely tax-free. Has been laid. Since the amount found in your calculation is ₹2,88,462, which is much less than the statutory limit of ₹20 lakh, the entire amount will be credited to your account during full and final settlement without any TDS deduction.
To receive gratuity, it is mandatory for the employee to complete 5 years of continuous service in the same organization. If an employee resigns even after 4 years and 11 months, he cannot legally claim gratuity. However, there is a major exception to this rule—if the employee dies during service or becomes permanently disabled due to some accident or disease, the minimum service requirement of 5 years is waived off completely and the entire gratuity is paid immediately to his next of kin or nominee.