![\"Formula](\"https:\/\/mydegreeonline.in\/blog\/wp-content\/uploads\/2024\/07\/Formula-for-Gratuity-Calculation-my-degree-online-1024x576.jpg\")
<\/figure>\n\n\n\nTo answer what gratuity is and how it is calculated, we refer to the formula defined in the Payment of Gratuity Act, 1972.<\/h3>\n\n\n\n
For employees covered under the Act, the formula is:<\/p>\n\n\n\n
For employees covered under the Act, the formula is:<\/p>\n\n\n\n
Gratuity = (Last\u00a0drawn\u00a0salary)\u00d7(15\/26)\u00d7(Number\u00a0of\u00a0years\u00a0of\u00a0service)<\/p>\n\n\n\n
- \n
- Last drawn salary<\/strong>: Includes basic salary and dearness allowance.<\/li>\n\n\n\n
- 15\/26<\/strong>: Represents 15 days out of 26 working days in a month.<\/li>\n\n\n\n
- Number of years of service<\/strong>: If an employee has served more than 6 months in the last year, it is rounded up to the next full year. If less than 6 months, it is not counted.<\/li>\n<\/ul>\n\n\n\n
Example Calculation:<\/h2>\n\n\n\n
For a better understanding of what gratuity is, let’s look at an example calculation.<\/h3>\n\n\n\n
Assume an employee has a last drawn salary of \u20b950,000 and has worked for 10 years and 7 months.<\/p>\n\n\n\n
- \n
- Last drawn salary:<\/strong> \u20b950,000<\/li>\n\n\n\n
- Number of years of service<\/strong>: 11 (10 years and 7 months rounded up to 11 years)<\/li>\n\n\n\n
- Gratuity calculation<\/strong>: =\u20b950,000\u00d715\/26\u00d711<\/li>\n<\/ol>\n\n\n\n
Let’s calculate this step by step:<\/h4>\n\n\n\n
15\/26=0.5769<\/p>\n\n\n\n
50,000\u00d70.5769 – 28,845<\/p>\n\n\n\n
50,000 \\times 0.5769 = 28,84550,000\u00d70.5769=28,845<\/p>\n\n\n\n
28,845\u00d711 – 3,17,295<\/p>\n\n\n\n
So, the gratuity amount is \u20b93,17,295<\/strong><\/p>\n\n\n\n
Tax Exemption:<\/h2>\n\n\n\n
![\"tax](\"https:\/\/mydegreeonline.in\/blog\/wp-content\/uploads\/2024\/07\/tax-Exemption-my-degree-online-1024x576.jpg\")
<\/figure>\n\n\n\nKnowing what gratuity is also involves understanding its tax implications.<\/h3>\n\n\n\n
Under the Income Tax Act, gratuity received by an employee is exempt from tax to the extent specified:<\/p>\n\n\n\n
- \n
- For government employees, the entire gratuity amount is exempt from tax.<\/li>\n\n\n\n
- For non-government employees, it is exempt up to the least of the following:\n
- \n
- The actual amount of gratuity received.<\/li>\n\n\n\n
- \u20b920,00,000 (as per current limits, subject to change).<\/li>\n\n\n\n
- 15 days’ salary for each year of service, based on the last drawn salary.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n
Important Notes:<\/h2>\n\n\n\n
- \n
- The maximum amount of gratuity payable is \u20b920,00,000 as per the latest amendments.<\/li>\n\n\n\n
- The calculation method may differ for employees not covered under the Payment of Gratuity Act, 1972, and it can depend on the terms of their employment contract.<\/li>\n<\/ul>\n\n\n\n
Conclusion<\/h2>\n\n\n\n
In summary, knowing what gratuity is helps employees understand their benefits and financial planning for retirement.<\/p>\n\n\n\n
Upgrade your qualifications to an MBA without quitting your job. Consider enrolling for an ONLINE MBA from top-ranked universities in India. Get free expert guidance and mentoring<\/a>.<\/h4>\n\n\n\n
- Number of years of service<\/strong>: 11 (10 years and 7 months rounded up to 11 years)<\/li>\n\n\n\n
- 15\/26<\/strong>: Represents 15 days out of 26 working days in a month.<\/li>\n\n\n\n