How Is Gratuity Calculated for Employees?

Gratuity is a monetary benefit paid to employees as a token of appreciation for their long-term service to an organization. It is typically calculated based on the years of service and the last drawn salary of the employee. The calculation method varies depending on the laws of the country or the terms of employment.

Steps to Calculate Gratuity:

Determine the Eligibility:

The employee must have completed at least 5 years of continuous service to be eligible for gratuity.

Calculate the Last Drawn Salary:

The calculation is based on the last drawn salary, which usually includes basic salary and dearness allowance.

Use the Gratuity Formula:

The standard formula used for gratuity calculation is:

Gratuity = Last Drawn Salary × Number of Years of Service × 15 ÷ 26

Where:

• Last Drawn Salary = Basic Salary + Dearness Allowance
• Number of Years of Service = The total number of years the employee has worked for the employer
• 15 = The number of days used for calculation
• 26 = The total number of working days in a month

Check for Any Special Provisions:

In some countries, there may be caps or limits on the gratuity amount, or the organization may have its own policies for calculating gratuity.

Deduct any Advances or Loans (if applicable):

Any advances or loans taken by the employee from the employer may be deducted from the gratuity amount.

Legal Actions and Protections:

Statutory Gratuity Payments:

In many countries, gratuity is a statutory benefit under labor laws. If an employee is entitled to it, the employer is legally obligated to pay the gratuity within a specific time frame after the employee leaves the organization.

Gratuity Fund:

Some organizations maintain a gratuity fund, where they contribute a certain amount periodically to ensure the gratuity liability is met when required.

Disputes:

If there are any issues with the gratuity payment, the employee can approach labor tribunals or consumer protection courts to seek resolution.

Example:

If an employee has worked for a company for 10 years and their last drawn salary (basic + dearness allowance) is ₹50,000 per month, the gratuity calculation would be:

Gratuity = 50,000 × 10 × 15 ÷ 26 = ₹2,88,461.53

Thus, the employee would be entitled to ₹2,88,461.53 as gratuity.

This formula applies to the employees who have worked for an organization for more than five years, in accordance with the relevant labor laws.