Employees can claim gratuity benefits when they retire or when they resign after working for the same employer for five continuous years. This is a financial reward or a token of appreciation that employees receive from their employers when they maintain service to the company for an extended period. In order to calculate the employee's gratuity, two factors must be considered: the last salary drawn and the number of years the employee has worked for the company.
All other components of the salary are excluded from the last drawn salary, which includes only the basic salary and dearness allowance. Gratuity is calculated by multiplying the number of years of service by 15 days of salary. The last month's salary is divided by 26 and then multiplied by 15 to arrive at the 15 days salary. It is important to note that gratuities are available only to those employees who are covered by the Payment of Gratuity Act.
In the example above, if your last drawn salary (basic + DA) is Rs 50,000 and you have worked for the firm for 10 years at the time of resigning or retiring, you will be eligible for Rs 2,88,461 in gratuity {(50,000/26X15) X 10}. As long as the amount of gratuity is below Rs 20 lakh, it is tax-free.