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What is Gratuity?

Gratuity is a benefit that is payable under the Payment of Gratuity Act 1972. That is a financial component offered by an employer to an employee in recognition of his/her service rendered to an organization. It is a part of the salary an employee receives and can be viewed as a benefit plan designed to aid an individual in his/her retirement. It is paid by an employer when an employee leaves the job after serving the same organization for a minimum period of 5 years. One can consider it to be a financial “Thank you” to an employee for rendering continuous service to an employer.

Gratuity Eligibility Criteria

  1. An individual should qualify for superannuation
  2. An individual must have retired from his/her job.
  3. In case of the death of the individual, or if one has become disabled due to some accident or sickness.
  4. An individual has resigned from the services of the company after remaining employed with it for at least five years.


Gratuity Calculation Formula
Listed below are the components that go into the calculation of the gratuity amount. The amount is also dependent upon the number of years served in the company and the last drawn salary.

Gratuity = N*B*15/26

N = number of years of service in a company

B = last drawn basic salary plus DA

For example, Sheaker has worked with a company for 20 years and had Rs.25,000 as his last drawn basic plus DA amount, then,

Gratuity Amount for Amit = 20*25,000*15/26 = Rs.2,88,461.54

However, an employer can choose to pay more gratuity to an employee. Also, for the number of months in the last year of employment, anything above 6 months is rounded off to the next number while anything below 6 months in the last year of employment is rounded off to the previous lower number.

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