Gratuity: What it is, how it’s calculated and why it matters
Gratuity is a lump-sum payment provided by an employer to an employee in recognition of long service and loyalty. The rules, eligibility and calculation methods vary between countries and even between companies. Many organizations use a formula based on the employee’s last drawn basic salary (plus dearness allowance, if applicable) and the number of years served. This page offers a practical gratuity calculator that implements the common statutory formula (widely used in India) and provides an option for a custom formula for other jurisdictions or company-specific policies.
Common statutory formula (India — for reference)
In India, the usual statutory formula used under the Payment of Gratuity Act is:
Gratuity = (Last drawn basic pay + dearness allowance) × 15/26 × Number of completed years of service
Why 15/26? The law defines gratuity as 15 days’ wages for every completed year of service. Since a month is often accounted as 26 working days for this purpose, 15/26 calculates the proportion of a full month. The multiplier 15/26 is approximately 0.576923 — when multiplied with the monthly salary and by completed years, it gives the gratuity amount.
What counts as “years of service”?
Typically, only completed years are counted for statutory calculations. For instance, 9 years and 11 months is often considered 9 completed years. However, some employers round up or provide pro-rata payments based on months and days. This calculator computes an exact duration (years, months, days) between joining and relieving dates and demonstrates both completed years and the prorated amount (if employer policy allows).
Why last drawn basic and DA?
Gratuity calculations are normally based on the regular emoluments that form part of salary components designated as basic pay and dearness allowance — these are the recurring components used to compute statutory benefits. Allowances like HRA, conveyance, or special incentives are usually excluded from the gratuity base unless policy or law specifies otherwise.
Eligibility and minimum service
In many legal frameworks, employees must complete a minimum period of continuous service (for example, five years) to be eligible for statutory gratuity. Employers may choose to be more generous and pay gratuity earlier, or may have different internal policies. Always verify the applicable rules in your country and your company’s HR policy.
Pro-rata and employer discretion
If an employee has not completed the minimum statutory tenure but has served for a considerable period, some employers pay gratuity on a pro-rata basis as a goodwill measure. Our calculator can be used in these scenarios to estimate what a pro-rata gratuity would look like if the employer agrees.
Tax considerations
Tax treatment of gratuity differs across jurisdictions. In some countries, statutory gratuity up to a certain limit is tax-exempt; beyond that limit, the excess may be taxable. For accurate tax planning, consult a tax professional or refer to the tax laws applicable to your residency and employment type.
How employers compute gratuity in practice
Employers typically:
- Confirm last drawn basic salary and dearness allowance
- Verify joining and relieving dates to compute completed years
- Apply the statutory multiplier or company policy multiplier
- Round the amount as per payroll rules
- Account for any prior gratuity payments or recovery clauses
Using this calculator
Enter the last drawn basic and DA amounts, select the joining and relieving dates (or the "as-of" date for ongoing employment), choose the calculation policy (statutory India or a custom multiplier) and click Calculate. The tool will:
- Show total completed years, months and days of service
- Provide the gratuity amount calculated with the chosen formula
- Offer a breakdown and let you export the results as CSV for record keeping
Practical tips
- Keep documentation of joining and relieving dates — small date differences change the gratuity amount.
- Confirm whether your employer includes DA in the gratuity base.
- If you're an employer, be transparent in showing how the gratuity was computed to employees.
- When in doubt about tax treatment, save records and seek professional guidance.
When to consult HR or a lawyer
If there is a dispute about eligibility, calculation method, or contract terms, consult your company's HR department or seek legal advice. Statutory laws may provide dispute resolution mechanisms; having a clear, exportable calculation helps in discussions.
Final thoughts
Gratuity is an important part of retirement and employment planning. Whether you are an employee estimating future benefits or an employer preparing payroll liabilities, using a robust calculator helps you plan accurately and keep clear records. Use this tool as a reliable starting point, but always confirm details with your HR or legal counsel to reflect the precise rules that apply in your situation.