What does gratuity mean in pay, and how is it calculated? This guide will help you grasp this concept with ease!
What is Gratuity in Salary?
Back when I first started working in a particular organization, I had no idea that something like gratuity even existed. Over time, I learned that gratuity is more than just a monetary benefit—it’s a token of appreciation from employers to employees. It’s typically paid when an employee leaves the company through retirement, resignation, or unfortunately, even death.
This reward acts as a financial cushion during significant life transitions, offering a sense of security for those who have dedicated a big part of their lives to a stable career. In my case, knowing this gave me extra motivation to stay committed and loyal to my employment.
In India, gratuity is not just a goodwill gesture—it’s governed by strict labor laws. The Payment of Gratuity Act 1972 mandates that an employee must have completed at least five years of continuous service with the same employer to be eligible for payment.
However, the requirement is waived if the employee suffers death or disablement, which is a humane consideration. Different countries have varying criteria, but typically, factors such as organization size, nature of employment, and tenure play key roles in eligibility.
As someone who’s navigated these policies firsthand, I can say that understanding the regulations in your country can save you from confusion later on.
Is Gratuity Deducted from Salary?
When I received my first employment offer, one of my immediate concerns was whether gratuity would be deducted from my salary. What I came to understand is that gratuity is actually an end-of-service benefit—a lump sum amount that the employer pays. It’s not something taken from your monthly earnings. However, things aren’t always that simple.
Some companies may structure your contract by showing gratuity as a part of your CTC (Cost to Company). This means that while you’re technically being paid it, the way it’s presented can be confusing. That’s why I always recommend thoroughly reviewing your employment terms before joining any new job. It helps you understand your compensation package in a more transparent and confident way.
How to Compute Gratuity in Salary?
While working in a reputed organization, I learned that either the employee or the company is responsible for paying gratuity—sometimes with or without deductions from the salary, depending on the company’s rules. The amount you receive is calculated using a formula that considers your last drawn salary and the total number of years of service rendered. If you’re working in India, there’s a specific way to calculate this.
Here’s the formula:
Gratuity = Number of Service Years × Last Basic Salary × 15 / 26
Now, your last drawn salary usually includes your basic salary and dearness allowance, but excludes any other allowances or bonuses. The 15/26 factor is interesting—it basically represents 15 days of wages for each completed year of service.
To make this clearer, let’s look at an example. Suppose a worker has served a company for 6 years, and his Last Basic Salary is ₹15,000. When you apply the formula:
Gratuity = 6 × 15,000 × 15 / 26 = ₹51,923
This calculation gave me a real sense of the benefits of long-term service.
Checkout online gratuity calculator UAE
How to Calculate Gratuity in Salary for Employees Not Covered Under the Gratuity Act 1972?
Some companies that are not covered under the Gratuity Act 1972 still offer gratuities to their employees. In such a case, the gratuity in salary is calculated using a slightly different formula:
Gratuity = (15 × Last Basic Salary × Service Tenure) / 30
To make this simple, let’s look at an example. Suppose an employee has worked in a company for 10 years, and his Last Drawn Salary is ₹30,000. When we apply the formula:
Gratuity in Salary = 15 × 30,000 × 10 / 30 = ₹150,000
This alternate method of calculation still honors the benefits an employee is entitled to based on their service.
Some other vital components of gratuity include:
– Dearness Allowance
– Last Drawn Basic Salary
– Other Employee’s Benefits
Understanding these key elements can help you make more informed financial decisions regarding your long-term employment.
Gratuity Computation in Salary in Case of Employee’s Death
In unfortunate cases where an employee dies during service, the gratuity in salary is computed based on the job tenure. The service tenure plays a key role in deciding how much the gratuity would be.
If the service duration is less than 1 year, the nominee is entitled to 2 times the Basic Salary.
If the service is equal to or more than 1 year but below 5 years, the gratuity will be 6 times the Basic Salary.
For those who have served 5 or more years but less than 11 years, the amount equals 12 times the Basic Salary.
If the service tenure is 11 or above but below 20 years, then 20 times the Basic Salary is paid.
In cases of more than 20 years of service, gratuity is calculated as half of the Basic Salary for each 6 months, with a maximum limit of 33 times the Basic Salary.
These structured slabs ensure financial support to the family of a deceased employee based on their dedication and length of service.
Income Tax Policy for Employee’s Gratuity
When it comes to Government employees, one big relief is that no income tax is applicable on the gratuity amount they receive.
For employees working with companies that are covered under the Gratuity Act, 15 days of salary—specifically the last basic salary—is exempted from income tax.
Moreover, these employees are also exempted from income tax on gratuity amounts up to ₹20 lakhs, providing them significant tax benefits upon retirement or end of service.
Read more: Apply for an E Signature Card in UAE
Wrapping up
Employees must stay aware of their rights and entitlements when it comes to gratuity in salary. It’s essential to track your service tenure, maintain accurate documentation, and actively communicate with your employer regarding the payment of gratuity.
To avoid any confusion or delays, it is highly advisable to review your company’s policies and procedures related to gratuity. Doing so helps ensure a smooth and hassle-free experience when claiming what you’re rightfully owed.
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