Quit job or retiring? Here's how you can calculate gratuity

Gratuity is paid to an employee as a lump sum when s/he retires, resigns, dies or becomes disabled because of an accident or an illness. The working condition is that the employee should have served for at least five continuous years. Gratuity is basically a reward or gratitude an employee receives from an employer as a recognition of his continuous service to the company, firm or the institution. Both private and public employers pay gratuity to their respective employees. The rules regarding gratuity are governed by the Payment of Gratuity Act, 1972. The law says, "Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years." 

Also, the gratuity is to be paid,

(a) on the employee's superannuation, or
(b) on the employee's retirement or resignation, or
(c) on the employee's death or disablement due to accident or disease. 

Exception: The completion of continuous service of five years is not necessary when the employment of an individual is terminated because of death or disablement. 

Here's how you can calculate gratuity: 

Two factors are taken into consideration for gratuity calculation: 

i. The number of years of service; ii. The last drawn salary. 

The salary considered for gratuity calculation is Basic salary + Dearness Allowance. All other components of your monthly pay are excluded for gratuity calculation. 

You can calculate your gratuity amount by multiplying the total number of years you have served with an organisation with 15 days of salary. 

Here, the 15 days salary is derived by dividing your last drawn salary by 26 and multiplying the outcome by 15, This adjustment, however, doesn't apply to workers who are not covered by the Payment of Gratuity Act 1972. 
Gratuity calculation: 

Let's assume that the last drawn Basic and DA by you was Rs 40,000 and you served the organisation for five years. 

As per the formula mentioned above, your gratuity amount would be: 

{(Rs 40,000/26)x15}x5 = Rs 1,15,384.

Income Tax exemption on gratuity

Currently, gratuity up to Rs 20 lakh is exempted from tax for employees covered under the Payment of Gratuity Act. Finance minister Arun Jaitley had tweeted in March this year that the Rs 20 lakh exemption limit would also be made available to employees not covered by the Payment of Gratuity Act and to all government employees.