Complete Guide on Gratuity Formula

Gratuity is a sum of money paid by an employer to an employee for services rendered in the company. The payment of Gratuity Act was passed in the year 1972 and covers employees engaged in mines, factories, oil fields, plantations, companies, ports and other such establishments which have more than ten employees. The gratuity amount unlike provident fund is totally paid by the employer without any contribution from the employee.

Either an employee can offer a gratuity benefit on his own or with a group gratuity plan, through an insurance provider. The annual contributions are then paid by the employer to the insurance provider for this. There exists a provision for the employee to contribute to his/her gratuity amount as well. The gratuity paid by the insurance company is based on the clauses in the group insurance scheme.

To be eligible to be covered under the Gratuity scheme, an employee has to fulfil certain conditions as listed below.


  • He should be eligible for superannuation
  • He retires from service
  • He resigns after working for 5 years with a single employer
  • He passes away or suffers disability due to illness or accident


Any company, even if it is not registered under the Gratuity Act, can still cover an employee under Gratuity Benefits. Here are two scenarios which explain that.

The Gratuity amount depends upon the number of years an employee has served in a company, plus his last drawn salary. The Gratuity calculator presents a simple formula which can be used to calculate the Gratuity amount.

Gratuity = N*B*15/26; where N: No. of years worked and B: Last drawn salary (Basic Salary) + DA or Dearness allowance.


  • For a Company, registered under Gratuity Act;



An employee, ‘A’ works for a company, ‘XYZ’ for a period of 20 years and 6 months and his last drawn basic salary is Rs. 60,000 P.M;

His Gratuity amount will be: (15 X 60,000 X 21)/26 = Rs. 7.26 lakh 


Note: It is to be noted that for calculation purpose, the number of years worked by the employee, in the above case, is taken as 21 years, since he has worked for more than 6 months in a year. Had he worked for 20 years and 5 months then the total years worked would have been taken as 20.


  • For a Company, not registered under Gratuity Act;


In this case, the formula for calculating Gratuity will be;  

Gratuity = N*B*15/30

If we take the same parameters for calculation then the Gratuity amount would turn out to be (15 X 60,000 X 20) /30 = Rs 6 lakh 

Note: In this case, the number of years worked by employee, ‘A’ is taken as 20 and 21 as here, the number of years are taken on the basis of each completed year of service.

Should an employee wish to forfeit his gratuity amount, he can do so as, according to the Payment of Gratuity Act of 1972, an employer holds the right to forfeit their gratuity payment, either wholly or partially despite the employee having completed 5 and more years of service in a company. However, this is applicable only when the employee has been terminated due to disorderly conduct wherein he/she tries to physically harm individuals during the course of his/her employment.

There are many tools available online too. Employees can visit this web-link to calculate gratuity online;

The employer is committed to pay the gratuity amount to the employee within 30 days from billing. If this amount is not paid within the stipulated time, the employer will have to bear a simple interest on it from the date on which it is payable. The rate of simple interest calculation will not be higher than the rate specified by the Central Government. Gratuity is usually paid in cash. In case the payee desires, it canbe paid through a demand draft or a cheque.


Gratuity Calculator – Frequently Asked Questions

Questions Answers
  • Can an employee claim Gratuity Benefit, if he serves an organization for 4.5 years
  • No, he cannot, as the minimum period he has to serve in an organization as per gratuity act is 5 years.
  • Can an employee, serving as a contract employee in a company, claim gratuity, if he resigns after 5 years
  • In this case, he is eligible to claim gratuity, through his contractor and not through the company, where he is employed.
  • Can an employee, working in a company, not covered under the gratuity act, claim gratuity benefit
  • Yes he can. However, in this case, if he serves an organization for sat 1 year and 7 months, his years of service is taken as 1 and not 2.
  • What is the maximum gratuity amount payable
  • The maximum gratuity amount payable by any company is 10 Lakhs.
  • Can a nominee claim gratuity on my behalf in the event of my death
  • Yes. He/ She can. For which, the employee has to fill in Form F while joining the company.