Demystifying Gratuity Rules: Understanding the Rule, Formula, and Calculation
Gratuity is a vital financial benefit for employees, offering security and recognition for their loyal service. Knowing the intricacies of gratuity rules, formulas, and calculations is crucial for both parties involved. This guide provides a thorough exploration of gratuity to break down its complexities.

What is Gratuity?
Gratuity is a one-time payment made by employers to employees as a token of appreciation for long-term service. Governed by the Payment of Gratuity Act, 1972, it is a statutory entitlement for employees who have served continuously for at least five years with the same employer.

Gratuity Calculation Formula
The formula for calculating gratuity is specified in the Payment of Gratuity Act:
Gratuity = (Last Drawn Salary × Number of Completed Years of Service × 15/26)
Where:

• Last Drawn Salary: Comprises basic salary, dearness allowance, and commission (if any).
• Number of Completed Years of Service: The total years an employee has worked with the organization.

Key Gratuity Rules

1. Eligibility Criteria:
   • Employees qualify for gratuity after five years of continuous service.
   • Gratuity is applicable upon retirement, resignation, or demise.
2. Calculation Based on Service Tenure:
   • The gratuity amount increases with service duration.
   • Service periods over six months are rounded up.
3. Applicability of the Act:
   • The Payment of Gratuity Act covers organizations with 10 or more employees in the previous year.
4. Tax Implications:
   • Gratuity for government employees is fully tax-exempt.
   • For others, the tax exemption is the lowest of: Actual gratuity received, 15 × Last Drawn Salary × Number of Years of Service × Maximum Limit Factor/26

Gratuity Calculation Example
For example:

• Last Drawn Salary: $50,000
• Number of Completed Years of Service: 10 years

Applying the formula:
Gratuity = ($50,000 × 10 × 15/26)
This calculation determines the final gratuity amount.

Conclusion: Navigating the Gratuity Landscape
Understanding gratuity rules, the related calculation formula, and factors involved is critical for both employers and employees. It ensures equitable and transparent distribution of this financial benefit, encouraging loyalty and recognition within the workplace. Employers should comply with statutory guidelines, and employees must know their rights under the Payment of Gratuity Act, promoting a cooperative work environment. As a core component of employee benefits, gratuity signifies the lasting connection between employers and their devoted workforce.