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Employers in India pay gratuity to employees leaving after five years of service, as per the 1972 Act. It’s 15 days’ wages per year, about 4.81% of the annual basic salary.
The Payment of Gratuity Act of 1972 governs this payment in India.
Gratuity Calculation: When you receive a job offer, the CTC (Cost to Company) often includes gratuity and the employer’s contribution to the Employees’ Provident Fund (EPF). While calculating the EPF contribution is straightforward, understanding how gratuity is determined can be less clear.
What is Gratuity?
Gratuity is a sum of money paid by an employer to an employee upon leaving the organization, after completing a minimum service period, typically five years. The Payment of Gratuity Act of 1972 governs this payment in India.
Calculating Gratuity
The formula for calculating gratuity is based on the employee’s last drawn basic salary:
Last drawn monthly wage x 15 / 26 x no. of years
This translates to 15 days’ wages for every completed year of service, as mandated by the Act.
For instance, if an employee’s annual basic salary is Rs 100, the monthly basic salary would be Rs 8.33 (Rs 100/12). The gratuity per year of service would then be 4.81 (8.33 x 15/26).
In your offer letter, gratuity is typically represented as 4.81% of your annual basic salary. This percentage is derived from the gratuity calculation formula.
Example Calculation
Given Data:
- Last drawn annual basic salary = ₹6,00,000
- Monthly basic salary = ₹6,00,000 ÷ 12 = ₹50,000
- Years of service = 10
Applying the Formula:
Gratuity = (Last drawn monthly basic salary × 15 / 26) × No. of years of service
= (₹50,000 × 15 / 26) × 10
= (₹28,846) × 10
= ₹2,88,460
So, the employee would receive ₹2,88,460 as gratuity for 10 years of service.
Alternatively, in an offer letter, gratuity is usually mentioned as 4.81% of the annual basic salary:
Gratuity = (4.81% of ₹6,00,000)
= ₹28,860 per year of service.
Impact of Salary Revisions
The portion of CTC allocated to gratuity is subject to change whenever your basic salary is revised, usually during annual appraisals. As gratuity is calculated on the last drawn basic salary, any increase in basic salary will lead to a corresponding increase in the gratuity provision.
