The Payment of Gratuity Act, 1972
Calculation of Gratuity
How gratuity of an employee is to be calculated?
Section 4 of the Payment of Gratuity Act, 1972 deals with calculation of gratuity. The Explanation to the Act inserted by Act No. 22 of 1987 (w.e.f. 1-10-1987) provides that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement.
Example: Mr. A joined an establishment in February, 1995 at Rs. 5,000 per month. His wages were raised to Rs. 15,000 per month in January, 2015. He retired on 31st January, 2016. The amount of gratuity payable to him shall be calculated as under:
Mr. A. retired on : 31.1.2016
Joined on : 1.2.1995
Total service : 21 years
His last drawn monthly salary Rs. 15,000
The gratuity for the period of 21 years
= 15 days wages x 21
Monthly wages last drawn 15000
= ——— x 15 x 21
Hence, the calculation will result as follows
= Rs. 1,81,731 will be payable towards gratuity.
In case of seasonal establishment
Gratuity payable = 7 days’ wages x Number of seasons for which employed.
- Service period in excess of six months in the subsequent year will be treated as one year for calculation of gratuity. Thus, if an employee has worked for five years and six months it will be treated as six years. A day less than six months in the sixth year will not be counted as a year.
- Total amount of gratuity will not exceed Rs. 3,50,000.00.
- Completion of continuous service of five years shall not be necessary where the termination of employment of any employee is due to death or disablement due to accident or disease.