Boost Your Finances: Calculating Gratuity for a Brighter Future

Navigating the route towards financial freedom often mandates acquiring a keen understanding of the many variables involved. One such key variable is ‘gratuity’. It is a substantial part of your salary component, which if accurately calculated and wisely invested, can yield significant rewards. So, it becomes crucial that you know how to calculate gratuity.

Gratuity, generally, is a sum of money paid by an employer to an employee for the services rendered in the company. However, only employees who have completed five years or more with the company are eligible for this benefit, as per the Payment of Gratuity Act, 1972. It is a legally enforced benefit and a crucial part of your retirement kitty.

Now, let’s understand the gratuity formula in detail. As per the Act, the calculation of gratuity depends on two key elements – Last drawn salary which includes basic wage and dearness allowance and the number of years of service with the employer. The formula is as follows:

Gratuity = [ (Basic Pay + Dearness Allowance) x 15 days x Number of years of service ] / 26

So for instance, if you have a last drawn basic pay of ₹30,000 per month, and you have rendered seven years of continuous service, your gratuity would be calculated as follows:

Gratuity = (₹30,000 * 15 * 7) / 26, which equates to approximately ₹242,308.

The ’15 days’ in the formula represents half a month’s salary, to adjust for the 15 days in the month (the maximum number of days in the month’s first or second half), and the ’26’ stands for the number of days in a standard working month in India.

However, it’s important to note that according to the Act, the amount of gratuity payable should not exceed ₹2 million. So even if the amount calculated by using the formula exceeds this limit, the maximum amount that can be received is restricted to ₹2 million.

Calculating gratuity can surely help you gain a more detailed and accurate perspective of your financial health. By understanding how much money you’re likely to receive at the end of your tenure, you can plan your future expenses and savings accordingly. This can also aid in creating a robust financial plan that can pave the way for a more settled and secure financial future.

In conclusion

Gratuity acts as a powerful tool in ensuring a solid retirement corpus. Understanding how to calculate gratuity and incorporating the sum in your overall financial strategy can help you create a strong and secure foundation for your future. Remember, careful financial planning includes the adept handling of all types of income.

Moreover, the money received as gratuity is tax-exempt under Section 10(10) of the Income Tax Act, which is an added advantage. By calculating gratuity and integrating it into your financial planning, you are likely to create ample room for capital appreciation.


Calculating gratuity forms a significant part of financial planning. It is a sum paid by an employer to an employee who has completed five or more years of service. The key components to calculate gratuity include the last drawn salary, which consists of the basic wage and dearness allowance, and the number of service years. By applying the gratuity formula, one can gauge their potential future gratuity sum, facilitating informed financial decisions. However, the gratuity payable must not exceed ₹2 million as per the Payment of Gratuity Act, 1972. Inclusion of the calculated gratuity in your financial strategy can help in establishing a secure financial future. However, any investment in the financial market must be made after weighing all risks involved in trading in the Indian financial market.


This article is purely informational and should not be taken as financial advice. It’s crucial to do your research before making any investment decisions. Investing in the stock market involves risks, and you should contemplate all the pros and cons before investing.