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Gratuity Calculation Formula and Rules
June 27 , 2013

Gratuity forms part of your annual CTC but is paid to you only when you leave the job after minimum 5 years of service. The Payment of Gratuity Act, 1972 lays down rules for calculation of gratuity. Most companies use the prescribed method.

Formula for calculating gratuity

According to the rule book, gratuity amount is to be calculated as 15 days salary for every completed year of service at the rate of last monthly salary drawn. Number of working days is taken to be 26 hence monthly salary is to be divided by 26.

Gratuity due = 15 x (monthly salary/26) x number of service years 

Salary is not the entire monthly salary; rather it is just the Basic component. DA and fixed commissions are also included if they are applicable in salary. For calculation of number of service years, months over 6 are rounded off to the next year and months less than 6 are ignored.

So, for instance, if you worked in a firm from 7 March 2005 to 19 July 2013 and your last drawn salary was Rs 20,000 (Basic) then your gratuity would be Rs 15*(20,000/26)*8 = Rs 92,308.

Income tax on gratuity

For government staff entire amount received as gratuity is exempt from income tax. For those working in other firms under The Payment of Gratuity Act, the highest amount of the following three has gratuity exemption

  • Rs 10 lakhs
  • 15 days' salary for each completed year of service or part
  • Actual gratuity

For others in establishments not covered by the Act, highest of the following has tax exemption

  • Rs 10 lakhs
  • Half month's average salary for each completed year of service
  • Actual gratuity

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