How Is Gratuity Calculated After 5 Years of Service?

Also check how your employer has structured your salary.

My company showed gratuity as part of the CTC, but that doesn't mean that amount is simply paid out every year or that it represents the final gratuity amount.

For employees covered under the statutory formula, the calculation is based on the eligible salary and completed years of service. The usual formula uses 15 days of wages for every completed year of service, with the monthly salary divided by 26 for the calculation.

If you're close to completing another year of service, I'd also check how your employer counts the service period before assuming the exact amount.

I had the same confusion about the 5-year requirement.

Generally, gratuity becomes payable after 5 years of continuous service when an employee retires or leaves employment, although there are important exceptions. In particular, the 5-year condition doesn't apply in the same way in cases involving death or disablement.

One thing that surprised me was that the calculation isn't based on the average salary over the five years. It's generally based on the last drawn eligible salary and the completed period of service.

So if your basic salary increased significantly shortly before you leave, that can affect the gratuity calculation.

I'd check your employment records and the gratuity figure in your company's full-and-final statement rather than relying only on the CTC shown in your offer letter.

The formula you mentioned is the standard formula used for employees covered by the Payment of Gratuity Act:

Gratuity = (Last drawn salary × 15 × completed years of service) ÷ 26

For this purpose, “last drawn salary” generally refers to basic salary plus dearness allowance, where applicable. It isn't your total CTC or gross salary.

For example, if the relevant salary is ₹60,000 and you've completed 6 years:

₹60,000 × 15 × 6 ÷ 26 = approximately ₹2.08 lakh.

Your actual calculation can differ depending on whether the Gratuity Act applies to your employment and the components included in your salary. The Savetaxs explanation also distinguishes the statutory formula from calculations used where the Gratuity Act does not apply.