Gratuity is a lump sum that a company pays when an employee leaves an organization, and is one of the many retirement benefits offered by a company to an employee.
The Payment of Gratuity Act, 1972 (the Gratuity Act) is applicable to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments with ten or more employees. Gratuity is fully paid by the employer, and no part comes from an employee’s salary.
To be eligible for gratuity under the Gratuity Act, an employee needs to have at least five full years of service with the current employer, except in the event that an employee passes away or is rendered disabled due to accident or illness, in which case gratuity must be paid.
Gratuity is paid when an employee:
Is eligible for superannuation;
Retires;
Resigns; or
Passes away or is rendered disabled due to accident or illness (if an employee passes away, gratuity will be paid to the employee’s nominee).
Listed below are the components that go into calculation of 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 (from the Gratuity amt included in CTC)
B = last drawn basic salary plus DA
How to Calculate Gratuity?
For example, you have worked with a company for 20 years of 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