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Any employee who works in a company for over five years is entitled to get gratuity when he retires, resigns or is retrenched. The employee roughly gets half a month’s Basic and Dearness Allowance (DA) for every completed year of service as gratuity. Payment of gratuity is mandated by the Payment of Gratuity Act, 1972.
Here’s how gratuity is calculated:
(Number of years of service) x (Last drawn monthly Basic and DA) x15/26.
So, if the employee has served 30 years in the organisation and draws a monthly Basic and DA of Rs. 20,000 when he leaves the job, he will get gratuity of Rs. 3,46,154, calculated as (30 x 20,000 x15/26).
The organisation can choose to pay the employee more, but the maximum amount of gratuity, according to the Act, cannot exceed Rs. 20 lakh once the law is in force. It was Rs. 10 lakh earlier. Amounts paid above this will be in the nature of ex-gratia.
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