Gratuity Calculation: When an employee gets a job offer, it includes all the details in the CTC (Cost to Company). Gratuity and Employees Provident Fund (EPF) also contribute to the cost to company. The calculation of EPF is easy, but understanding the calculation of gratuity can be a bit complicated.
What is gratuity?
Gratuity is the amount that an employee is given while leaving the company. Provided he has completed five years or more service. In India, this payment comes under the Gratuity Act 1972.
How is the calculation of gratuity?
The calculation of gratuity is based on the final basic salary found by the employee. Its formula is:
Last monthly salary × 15/26 × number of years of service
Depending on the years of service, one gets an equal amount of salary of 15 days.
Suppose an employee’s annual basic salary is Rs 6,00,000.
Monthly Basic Salary = ₹ 6,00,000 ÷ 12 = ₹ 50,000
Years of service = 10
Now according to formula:
Gratuity = (₹ 50,000 × 15/26) × 10
In this way, the employee will get a gratuity of Rs 2,88,460 on 10 years of service.
How is gratuity written in offer letter?
Usually, the gratuity is written as 4.81% of the annual basic salary in the offer letter.
For example:
Gratuity = 4.81% ₹ ₹ 6,00,000 = 28,860 rupees annually.
What happens when salary increases?
Since gratuity is based on the final basic salary, whenever the salary increases, the calculation of gratuity also increases accordingly. It usually affects the time of annual salary appraisal.
Gratuity is an important part of leaving the job. Although it is part of the CTC, it is not directly found in the monthly salary, but is found after the job is over. It also has some conditions, after completion of gratuity.