Gratuity is a statutory benefit provided by employers to employees as a form of recognition for their long and meritorious service. In India, gratuity is governed by the Payment of Gratuity Act, and the calculation is typically included as part of the Cost to Company (CTC) structure. The formula for calculating gratuity is as follows:

Gratuity=(LastDrawnSalary×NumberofCompletedYearsofService×1526)

Here’s a detailed breakdown of the components:

1. Last Drawn Salary: This includes the basic salary and dearness allowance (if applicable). It does not include other components like bonuses, commissions, or allowances.
2. Number of Completed Years of Service:The period of service is rounded off to the nearest whole number of years. For example, if an employee has completed 5 years and 7 months, it is considered as 6 years for gratuity calculation.
3. 15:This constant factor (15) represents 15 days of salary for each completed year of service. The formula assumes a month to have 26 working days.
4. 26:The denominator (26) represents the number of working days in a month.

EXAMPLE:-

Let’s assume an employee, Mr. X, has worked for an organization for 10 years and has recently resigned. His last drawn basic salary is ₹50,000 per month.

Gratuity=₹50,000×15×1026

Gratuity=₹7,500,00026

Gratuity≈₹288,461.54

In this example, Mr. X would be eligible for a gratuity payment of approximately ₹288,461.54.

It’s important to note that the maximum gratuity amount payable under the Payment of Gratuity Act is currently capped at INR 20 lakhs. So, even if the calculated gratuity amount exceeds this limit, the employer is only liable to pay a maximum of INR 20 lakhs. Additionally, the formula may be adjusted based on any changes in the employee’s salary structure or amendments to the Gratuity Act.

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