How Does the Gratuity Calculator Work?
Gratuity is a monetary retirement benefit paid by an employer to an employee for continuous service rendered. Under the Payment of Gratuity Act, 1972, any establishment with 10 or more employees must pay gratuity to employees who complete a minimum of 5 consecutive years of full-time employment.
The formula awards 15 days of the last drawn basic salary plus dearness allowance (DA) for every completed year of service. If you have worked for more than 6 months in your final year (e.g. 7 years and 7 months), it is rounded up to the next full year (8 years).
Formula & Mathematical Methodology
For establishments covered under the Gratuity Act:
Where 26 represents the number of official working days in a month (excluding 4 Sundays). Under Section 10(10) of the Income Tax Act, gratuity received up to ₹20,00,000 is 100% exempt from income tax.
Step-by-Step Practical Calculation Example
If an employee leaves an organization after 12 years of service with a final monthly Basic + DA of ₹65,000:
- Calculation: (15 × ₹65,000 × 12) / 26
- Total Gratuity Payable: ₹4,50,000
- Taxable Gratuity: ₹0 (well within the ₹20 Lakh tax-free threshold)