The employees, be it government or private, are entitled to receive the gratuity. This amount is completely tax-free only if it is given using the formula as given by the Payment of Gratuity Act, 1971. You can easily calculate your gratuity amount beforehand. I’ve explained below as how you can calculate your gratuity amount with help of Gratuity Calculation Formula if you are covered under the Gratuity Act or not.

The Gratuity Act is applied to the employees where there are more than 10 working employees in their firm/company.

Calculating Gratuity For Employees That Are Covered Under Gratuity Act

Formula For Calculating Gratuity

This formula depends on the salary that was drawn the last and the service period. The formula is as given below;

Gratuity = Number of years of service x Last drawn 15-day salary = Number of years x 15/26 x Monthly salary

Let’s break this formula and see the meaning of each term:

1] Number of years of service

• Therefore, if you have 8 years and 7 months of service then it would be considered as 9 years. But if it was 8 years and 4 months, then it would be considered as 8 years.

2] Salary

• The salary includes both basic and allowance.
• But it does not include special allowances, reimbursements, HRA, bonus. Therefore, private sector employers tend to keep the basic salary low.
• The salary that is drawn last is considered for calculation of gratuity.
• A month is considered to have 26 days. The labor law states that each employee must have weekly offs and that is the reason behind this.
• Therefore, to calculate the salary last drawn for 15 days, then divide it by 26 and multiply it again by 15.

Example:

Let’s take this example of a person with following details:

Basic salary = Rs 20,000; Allowance = Rs 1000; Service years =  8 years and 10 months.

For Gratuity calculation, the salary will be Rs 21,000 and service period will be 9 years.

Therefore, Gratuity = 9 x 15/26 x 21,000 = Rs 1,09,038.

Calculating Gratuity For Employees That Are Not Covered Under Gratuity Act

There is a different formula for the employees who don’t come under the Gratuity Act. It is as given below:

Gratuity = Single day salary x 15 x total service years = (Avg salary of last 10 months)/30 x 15 x total service years.

Let’s go into details of each term:

1] Salary

• Salary includes basic salary, allowance as well as commission. Although, the commission should be a percentage of sales.
• The last drawn salary isn’t taken into consideration. Instead, the average of last 10 months salary is calculated.
• You need to get the per day salary; for that, divide the average by 30.

2] Total Service Years

• In this case, the total number of completed service years is taken into consideration.
• Therefore, if you have worked for 8 years and 10 months, it will be considered as 8 years.

Therefore, it becomes very clear that the employees not covered under Gratuity Act are at a disadvantage.

Calculating Gratuity For Employees On Daily Wages

For employees on daily wages, Gratuity calculation is a bit different. The formula is as follows:

Gratuity = Average daily wage of past 90 days x 15 x total service years

1] Salary

The average daily wage of past 90 days is considered as one day salary and gratuity is calculated.

Example

Consider the following details of a person:

Daily wage before 1 month = Rs 300; Daily wage of past 1 month = Rs 500; Overtime charges = Rs 1500; Total service years = 8 years and 6 months

Last 90 days average daily wage = [(300 x 60) + (500 x 30)]/90 = Rs 366.

Therefore, Gratuity = 366 x 15 x 8 = Rs 43,920.

The formula only gives you the minimum amount of gratuity that you can get from your employer. However, the employer can give you as much more gratuity as he/she wants, although, the excess amount will be taxed.