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Kolkata: As the name gratuity implies, it is paid by a company to an employee in recognition of his/her continuous service. The right to gratuity has been placed at the same level of primacy in law like EPF (Employees Provident Fund). The Gratuity Act applies to workers and employees of establishments which have 10 or more persons in its rolls. The Gratuity Act ensures employees have the right to better gratuity terms under any agreement or contract.
According to the Gratuity Act, there is a formula for the calculation of gratuity and the legislation lays it down. It is a simple and straightforward. The formula is the following:
(Last salary drawn by employee) x (Years of service of the employee) x (15/26)
Last drawn salary includes basic salary and DA (dearness allowance). A month typically consists of 26 working days. This fact explains the 26 in the denominator. The number 15 indicates that the calculation is done on the basis of salary of 15 days. Years of service of the employee means the number of years he/she has spent with the company in question.
The most important point to note is that rules stipulate that an employee must work for 5 years without a break in order to be eligible for gratuity. However, if an employee expires before the completion of 5 years in service this condition is waived. In that situation, the entire applicable amount is paid to the next of kin or the legal heir of the employee.
Employing the above formula, we can easily calculate the gratuity an employee will get after a period of five years of continuous service. Let’s assume for simplicity that the last salary of the worker is Rs 40,000. Then in the formula we will substitute the following:
Last Salary: Rs 40,000
Calculation: Rs 40,000 x 5 x (15/26)
Total gratuity payable to employee: Rs 1,15,384
In the second instance, let’s assume that the employee has completed 10 years of continuous service in the company. Let's say the last drawn salary has reached Rs 50,000. Therefore, gratuity payable at the end of 10 years of continuous service:
Last salary: Rs 50,000
Calculation: Rs 50,000 x 7 x (15/26)
Total gratuity payable to employee: Rs 2,88,461
Let's calculate the gratuity for the third and final instance. Now let's assume that the applicable salary has grown to Rs 1,00,000 or Rs 1 lakh. Let's do the substitution as under
Last salary: Rs 1,00,000
Calculation: Rs 1,00,000 x 20 x (15/26)
Total gratuity payable to employee: Rs 1,153,846
