When an employee gets a job offer, it includes all the details in the CTC. The cost to the company i.e. CTC also includes gratuity and Employees Provident Fund (EPF) contribution. While the calculation of EPF is easy, the calculation of gratuity can be a bit complicated to understand. Let’s know about it…
What is Gratuity: Gratuity is the amount that is given to an employee when he leaves the company. Provided that he has completed five years of service or more. In India, this payment comes under the Gratuity Act 1972.
How Gratuity is Calculated
Gratuity is calculated on the basis of the last basic salary received by the employee. The formula for this is:
Last monthly salary × 15/26 × Number of years of service
Based on the years of service, an amount equal to 15 days’ salary is received.
For example:
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 the formula:
Gratuity = (₹50,000 × 15/26) × 10
= (₹28,846) × 10
= ₹2,88,460
Thus, the employee will get a gratuity of Rs 2,88,460 for 10 years of service.
Let’s know how gratuity is written in the 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 = ₹28,860 per year
What happens when salary increases: Since gratuity is based on the last basic salary, whenever there is a salary increase, the calculation of gratuity also increases accordingly. This is usually reflected at the time of annual salary review. Gratuity is a significant part of the salary received on leaving the job. Although it is a part of CTC, it is not directly received in the monthly salary but is received after the termination of the job. Therefore, there are certain conditions, after which gratuity is received.
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