Gratuity Calculation: When an employee gets a job offer, all the details are included in the CTC (Cost to Company). Cost to Company also includes gratuity and Employee Provident Fund (EPF) contribution
Gratuity Calculation : When an employee gets a job offer, all the details are included in the CTC (Cost to Company). Cost to Company also includes gratuity and Employee Provident Fund (EPF) contribution. EPF calculation is easy, but understanding the calculation of gratuity can be a bit complicated.
What is gratuity?
Gratuity is the amount that is given to an employee when he leaves the company. Provided he has completed five years or more of service. In India, this payment comes under the Gratuity Act 1972.
How is gratuity calculated?
Gratuity is calculated based on the last basic salary received by the employee. Its formula is:
- Last monthly salary × 15/26 × number of years of service
- Based on the years of service, an amount equivalent to 15 days’ salary is received.
Example:
- Suppose the annual basic salary of an employee is Rs 6,00,000.
- Monthly basic salary = ₹6,00,000 ÷ 12 = ₹50,000
- Years of service = 10
Now, according to the formula:
Gratuity = (₹50,000 × 15/26) × 10
= (₹28,846) × 10
= ₹2,88,460
In this way, the employee will get gratuity of Rs 2,88,460 on 10 years of service.
How to write gratuity in offer letter?
Generally, gratuity is written in the offer letter as 4.81% of the annual basic salary.
For example:
Gratuity = 4.81% × ₹6,00,000 = Rs 28,860 p.a.
What happens when the salary increases?
Since gratuity is based on the last basic salary, whenever there is an increase in salary, the calculation of gratuity also increases accordingly. Usually it gets affected at the time of annual salary appraisal.
Gratuity is an important part of the salary that one gets on leaving the job. Although it is a part of the CTC, it is not directly given in the monthly salary, but is given after the job ends. It also has some conditions, after the fulfillment of which gratuity is given.
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