Gratuity is one of the most important components of an employee’s end-of-service benefits, rewarding long-term commitment and loyalty to an organisation. It is governed by the Payment of Gratuity Act, 1972, and becomes payable after completing five years of continuous service. Many employees use a gratuity calculator to estimate the amount they are eligible to receive. However, one crucial factor that affects the result is the salary structure. Understanding how salary elements influence gratuity ensures that you can plan your finances accurately and make informed career decisions.
Understanding what gratuity means
Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for continuous service. It is payable upon resignation, retirement, or in case of death or disablement. The amount depends on the employee’s last drawn salary and years of service with the organisation.
The Payment of Gratuity Act makes it mandatory for establishments employing ten or more people to provide this benefit. Knowing how to calculate gratuity helps employees verify the amount offered and ensure compliance with legal provisions.
How gratuity is calculated
The formula for calculating gratuity is as follows:
Gratuity = (15 × Last drawn salary × Years of service) ÷ 26
Here, the “last drawn salary” includes only the components that form part of your basic pay and dearness allowance. To simplify the computation, you can use a gratuity calculator, which automatically applies this formula once you input your details.
For example, if your last drawn salary (basic plus dearness allowance) is Rs. 50,000 and you have completed 10 years of service, your gratuity amount would be approximately Rs. 2.88 lakh.
The role of salary components in gratuity calculation
The most common misconception among employees is that all elements of their salary are considered for gratuity. In reality, only certain components are included.
Included components:
- Basic salary
- Dearness allowance (if applicable)
Excluded components: - House Rent Allowance (HRA)
- Conveyance allowance
- Bonuses, commissions, or performance incentives
- Special allowances
Since only basic pay and dearness allowance contribute to gratuity, employees with a higher proportion of variable pay receive lower gratuity benefits. Reviewing your salary structure regularly helps you understand how it affects the gratuity calculator results.
How changes in salary structure affect gratuity
If your employer revises your basic salary structure during your tenure, it directly impacts your gratuity amount. For example, increasing your basic pay by 10 per cent results in a proportional increase in gratuity.
Conversely, if most of your salary consists of allowances or variable pay, your gratuity will be lower. Using a gratuity calculator whenever your salary is revised helps you estimate the updated amount and plan accordingly for future financial needs.
The effect of tenure on gratuity calculation
Apart from salary, years of continuous service play a key role in gratuity computation. Employees who complete five or more years of service are eligible under the law. However, for organisations that pay gratuity on a voluntary basis, even shorter service periods may be considered.
The gratuity calculator multiplies the number of completed years with the fixed factor (15 ÷ 26), showing how longer tenures significantly increase the payout. It is, therefore, beneficial to stay longer with an employer to maximise your gratuity entitlement.
Gratuity in cases of resignation, retirement, or death
In case of resignation or retirement, employees can claim gratuity directly from their employer. If an employee passes away, the amount is paid to the nominee or legal heir, and the five-year service condition is waived.
In all cases, the employer must pay the amount within 30 days of it becoming due. If delayed, interest applies as per the Act. Employees can use a gratuity calculator to cross-verify the accuracy of the payment and ensure that the computation follows legal guidelines.
Tax treatment of gratuity
Gratuity is partially or fully exempt from tax depending on the category of employee.
- Government employees: Entire amount is tax-free.
- Private sector employees covered under the Act: Exempt up to Rs. 20 lakh.
- Private sector employees not covered under the Act: Exempt up to half a month’s average salary for each completed year of service, subject to Rs. 20 lakh limit.
It is important to maintain proper documentation and verify that your employer applies the correct exemption while processing the payment.
Why salary structure planning matters
Negotiating a balanced salary structure with a reasonable share of basic pay ensures a higher gratuity payout over time. Employees focused solely on variable incentives may lose out on long-term benefits. By using a gratuity calculator periodically, you can estimate your future entitlement and discuss salary restructuring if necessary to optimise post-employment benefits.
Using gratuity to strengthen long-term savings
Once you receive gratuity, it is important to channel it into safe and high-yield investments. Fixed Deposits (FDs) are a preferred choice due to their guaranteed returns and flexibility.
Bajaj Finserv offers digital FDs with competitive interest rates, flexible tenures from 12 to 60 months, and top safety ratings—CRISIL AAA/STABLE and ICRA AAA/STABLE. You can open an FD online and choose between cumulative or non-cumulative options to suit your income needs.
Investing part of your gratuity in Bajaj Finance FDs allows your funds to grow steadily while maintaining capital security.
Final thoughts
The gratuity calculator is a simple yet effective tool for understanding your retirement benefits, but it relies heavily on your salary composition. By maintaining a higher basic salary proportion and staying longer with your employer, you can significantly increase your gratuity entitlement. Proper planning, supported by strategic investment in safe instruments such as Bajaj Finance Fixed Deposits, ensures that your gratuity not only rewards your service but also supports your long-term financial goals.
