What is Gratuity?
Gratuity is a lump-sum benefit paid by an employer to an employee as a reward for long-term service, payable on retirement, resignation, superannuation, or death/disability. It is governed by the Payment of Gratuity Act, 1972 (for covered establishments).
Formula to calculate Gratuity
If covered under the Payment of Gratuity Act (most cases):
Gratuity= 15/26*Last Drawn Salary × Completed Years of Service
Where:
- Last Drawn Salary = Monthly Basic + DA
- 15 = 15 days’ wages per completed year
- 26/30 = Working days used in the divisor
- Completed Years: Under the Act, service of 6 months or more in the final year is rounded up to the next year; otherwise rounded down.
Gratuity Eligibility Criteria
Employees are entitled to gratuity under the following circumstances:
- On retirement from service.
- On becoming eligible for superannuation.
- On resignation after completing five consecutive years with the same employer.
- In the event of an employee’s death or disability due to illness or accident.
Benefits of Gratuity-
- Financial Security Post-Employment- It provides a lump sum amount to support employees after they retire, resign, or face job loss due to disability.
- Encourages Employee Retention- Gratuity is available after continuous service, so it encourages employees to stay longer with the organization.
- Acts as a Retirement Corpus- It adds to an employee’s retirement savings along with pension, provident fund, or other retirement benefits.
- Tax Benefits- When you retire, one of the financial benefits you can expect is a gratuity payment. The best part is that this amount may be partially or fully exempt from taxes, depending on specific conditions.
Example
Employee: Last Drawn Salary (Basic + DA) = ₹50,000/month
Service: 9 years 7 months (counts as 10 years under the Act)
Covered under the Act
Gratuity=15/26*50,000*10
= ₹2,88,462 (approx.)What is a Gratuity Calculator and How Does It Help?
A Gratuity Calculator quickly estimates your payout by taking:
- Last drawn monthly Basic + DA
- Years of service (it applies the rounding rule)
- Coverage (Act-covered or not)
In seconds, it shows you:
- Estimated gratuity amount
- Tax-free portion (based on current limits)
- Notes on rounding and eligibility
How to Use Finanjo’s Gratuity Calculator – Step-by-Step
- Enter Last Drawn Salary (Basic + DA) (e.g., ₹60,000)
- Enter Total Service (e.g., 12 years 4 months)
- Select Act-Covered or Not Covered
- (Optional) Mark Government Employee for tax result
- Get instant output: Gratuity amount and tax-exempt status