Gratuity Calculation: The government recently made some changes in the rules related to gratuity. However, this change in the rule is regarding tax on gratuity. According to the new rule, the limit of tax-free gratuity has been increased to Rs 25 lakh from existing up to Rs 20 lakh. This is the amount which an employee receives from the organization or employer.

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However, an employee will get the gratuity only if he or she works with the employer for at least 5 years. Usually, this amount is given when an employee leaves the job or retires. But in case of the death of an employee, due to any reason, or the employee leaving the job due to an accident, he or his nominee gets the gratuity amount.

What are the eligibility criteria for getting a gratuity?

According to the rules of the Gratuity Payment Act 1972, the maximum amount of gratuity paid can be up to Rs 25 lakh. But this will be paid only if an employee works in the same company for at least 5 years. An employee will not be eligible for gratuity in cases where he or she has not completed 5 years. Even if the employee has completed 4 years and 11 months, he or she will not be eligible for the gratuity. However, this rule does not apply in cases when an employee is unable to work with the organisation because of death or an accident.

How is gratuity calculated?

Total gratuity amount = (final salary) x (15/26) x (number of years worked in the company). 

Let's understand this calculation with an example:

Suppose you have worked for 7 years in an organisation and your salary is Rs 40,000 (including basic salary and dearness allowance), then the calculation would be like this-

(40000) x (15/26) x (7) = Rs 1,61,538. 

This calculation shows that you will get Rs 1,61,538  as a gratuity. 

What is 15/26 in the calculation?

Gratuity is calculated on the basis of 15 days in a year. Also, only 26 working days are counted in a month as it is believed that 4 days will be your off. An important thing about gratuity calculation is that if an employee works for more than 6 months, it will be calculated as one year.

If an employee works for 7 years and 7 months, then it will be considered as 8 years and the amount of gratuity will be calculated on this basis. At the same time, if one works for 7 years and 4 months then it will be considered as 7 years only. In the above example, the year of experience is seven years as it is less than six months in a year. 

Gratuity is decided in two categories

Under the Gratuity Payment Act 1972, employees have been divided into two categories to decide the formula for the amount of gratuity the employees will be entitled to get:

Category 1

The first category includes those employees who come under the purview of the Gratuity Payment Act 1972.

Category 2

This category includes those employees who do not come under the purview of the Gratuity Payment Act 1972.

Formula to determine the amount of gratuity (for employees covered under the Act) = Last salary x tenure of service x 15/26