What is Gratuity in Salary? Meaning and Complete Guide 2024
What is gratuity in salary, and how is it computed? This article will help you understand this concept!
What is Gratuity in Salary?
‘Gratuity in Salary’ means a monetary reward employers offer employees as a token of appreciation. Gratuity is typically paid to an employee upon retirement, resignation, or death, and it serves as a financial cushion during significant life transitions. The primary purpose of gratuity is to offer financial security to employees who have dedicated a significant part of their lives to a particular organization.
In many countries, gratuity is governed by specific labor laws and regulations. The eligibility criteria for gratuity vary from country to country but typically include certain factors, such as the employee’s service tenure, the organization’s size, and the nature of employment.
In India, for instance, the Payment of Gratuity Act 1972 mandates that an employee must have completed at least five years of continuous service with the same employer to become eligible for gratuity payment. However, this requirement is waived in case of an employee’s death or disablement.
Is Gratuity Deducted from Salary?
Generally, gratuity is not deducted from the employee’s salary; rather, it is an end-of-service benefit paid by the employer as a lump sum. However, some companies structure your contract by including gratuity as part of CTC (Cost to Company). Therefore, reviewing your employment contract before joining a new job is recommended to understand your compensation package better.
How to Compute Gratuity in Salary?
An organization or employee is solely responsible for paying gratuity to employees with or without deductions from the salary as per the company’s rules. The gratuity amount is calculated based on a formula that considers the employee’s last drawn salary and the number of years of service rendered. To calculate the gratuity amount from salary in India, there’s a specific formula given below:
Gratuity= Number of Service Years*Last Basic Salary*15/26
The last drawn salary includes basic salary and dearness allowance but excludes other allowances or bonuses. The 15/26 factor represents 15 days of wages for each completed year of service.
Let’s understand this formula with an example! Suppose a worker has served a company for 6 years and his Last Basic Salary is ₹ 15,000. By applying the above formula, the gratuity amount for the employee comes out to be
Gratuity= 6*15,000*15/26
= ₹ 51, 923
Also Check: Gratuity Calculator for UAE Employees
How to Calculate Gratuity in Salary for Employees Not Covered Under Gratuity Act 1972?
Some companies not covered under Gratuity Act 1972 also offer gratuities to their employees. In this case, the gratuity in salary is calculated based on the following formula:
Gratuity = (15*Last Basic Salary*Service Tenure)/30
Let’s understand this with an example! Imagine an employee has worked in a company for 10 years, and his Last Drawn Salary is ₹ 30,000. By applying the above formula, the gratuity amount according to salary is:
Gratuity in Salary= 15 *30,000*10/30
= ₹ 150,000
Other vital components of gratuity are:
- Dearness Allowance
- Last Drawn Basic Salary
- Other Employee’s Benefits
Gratuity Computation in Salary in Case of Employee’s Death
If an employee dies during service, his gratuity in salary will be computed based on his job tenure as follows:
| Service Tenure | Service Tenure of more than 20 years |
| Service duration less than 1 year | 2* Basic Salary |
| Service equal to or more than 1 year but below 5 years | 6* Basic Salary |
| 5 or more years of Service but below 11 years | 12* Basic Salary |
| 11 or above service years but below 20 years | 20* Basic Salary |
| Service Tenure more than 20 years | Half of the Basic Salary for each 6 months, subject to a maximum of 33 times of the basic salary. |
Income Tax Policy for Employee’s Gratuity
- For Government employees, no income tax is applicable.
- For employees working with companies covered under Gratuity Act, the 15 days of salary (the last basic salary) is exempted from income tax.
- The employees working in companies covered under Gratuity Act are exempted from income tax on ₹20 lahks.
Bottom Line
Employees should be aware of their rights and entitlements regarding gratuity in salary. They should keep track of their service tenure, maintain relevant documentation, and communicate with their employer regarding the payment of gratuity. It is advisable to review the company’s policies and procedures related to gratuity to ensure a smooth and hassle-free experience.
