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Gratuity Calculation Formula with Practical Example

Understanding the Gratuity Calculation Formula is essential for employees who want to estimate their gratuity benefits. At GratuityCalculator.co.in, we simplify this process by breaking down the formula and providing a practical example to help you calculate your gratuity amount accurately.

The Gratuity Formula

The gratuity amount is calculated based on the following formula under the Payment of Gratuity Act, 1972: Gratuity = (Last Drawn Salary × 15 × Years of Service) / 26

Where:

  • Last Drawn Salary: This includes your basic salary and dearness allowance (DA).
  • Years of Service: The total number of years you have worked with the same employer. Any fraction of a year beyond six months is rounded up to the next full year.
  • 15: Represents 15 days' salary for each completed year of service.
  • 26: Represents the number of working days in a month (excluding Sundays).

Practical Example

Let’s walk through a practical example to understand how the gratuity calculation works:

Scenario:

  • Last Drawn Salary (Basic + DA): ₹60,000 per month
  • Years of Service: 12 years and 7 months (rounded up to 13 years)

Step-by-Step Calculation:
  1. Calculate Last Drawn Salary (Annual): ₹60,000 × 12 = ₹7,20,000
  2. Multiply by 15: ₹7,20,000 × 15 = ₹1,08,00,000
  3. Multiply by Years of Service: ₹1,08,00,000 × 13 = ₹14,04,00,000
  4. Divide by 26: ₹14,04,00,000 ÷ 26 = ₹5,40,000

Final Gratuity Amount: ₹5,40,000

Key Points to Remember

While calculating gratuity, keep the following points in mind:

  • Gratuity is payable only if you have completed at least five years of continuous service.
  • Fractions of a year beyond six months are rounded up to the next full year for calculation purposes.
  • The maximum gratuity amount exempt from tax is ₹20,00,000 as per the latest amendment.
  • Gratuity is typically paid at the time of retirement, resignation, or termination of employment.

Use our free Gratuity Calculator to estimate your gratuity amount instantly without manual calculations. Simply enter your monthly salary and years of service, and let us do the math for you!