Calculating Gratuity in India: A Comprehensive Guide to Estimating Employee Benefits and Retirement Savings

Gratuity is a significant employee benefit provided by employers in India as a token of appreciation for an employee’s long and loyal service. It is a form of financial security that plays a crucial role in an employee’s retirement planning. In this comprehensive guide, we’ll delve into the nitty-gritty of calculating gratuity and explore its role in retirement savings.

Calculating Gratuity – The Basics

Gratuity in India is governed by the Payment of Gratuity Act, 1972. It is typically calculated based on the following formula by Gratuity calculator :

Gratuity = (Last drawn monthly salary) x (15/26) x (Number of years of service)

What Constitutes Last Drawn Salary?

The term “last drawn salary” includes basic salary, dearness allowance (if applicable), and any commission received by the employee. Bonuses, house rent allowance, or any other allowances are not considered when calculating gratuity.

Eligibility for Gratuity

To be eligible for gratuity in India, an employee must meet two criteria:

  1. The employee must have completed a minimum of five years of continuous service with the same employer. However, there are exceptions in cases of disability or death.
  2. The employer must have at least ten or more employees during the preceding twelve months for the Act to apply.

Tax Implications

Gratuity received by an employee is tax-exempt to a certain limit. As of my knowledge cutoff date in September 2021, the exemption limit was set at ₹20 lakhs. Any gratuity received beyond this limit is taxable as per the income tax slab of the employee.

Gratuity as Part of Retirement Savings

Importance of Gratuity in Retirement Planning

Gratuity is often considered a crucial element in an employee’s retirement savings portfolio. It provides a lump sum amount that can be used to cover various retirement expenses, such as medical costs, housing, or leisure activities. Employees who plan wisely can use gratuity to secure their financial future.

Sukanya Samriddhi Yojana for Future Generations

While gratuity serves as a retirement savings tool for employees, it’s equally important to consider the financial future of your loved ones. One excellent way to do this is by exploring government-backed schemes like the Sukanya Samriddhi Yojana (SSY).

Sukanya Samriddhi Yojana – A Gift for Your Daughter’s Future

The Sukanya Samriddhi Yojana is a special savings scheme launched by the Indian government, primarily aimed at securing the financial future of girl children. Parents or guardians can open an SSY account in the name of their daughter, which can be used for her education, marriage, or other significant life events.

Contributions made to the Sukanya Samriddhi Yojana account are eligible for deductions under Section 80C of the Income Tax Act. Moreover, Sukanya Samriddhi Yojana interest rates earned and the maturity amount are tax-free, making it an attractive and tax-efficient investment option.

Combining Gratuity and SSY for Comprehensive Financial Planning

When planning for your retirement and your daughter’s future, you can consider a combined approach. Use your gratuity amount wisely to secure your own retirement while simultaneously investing in the Sukanya Samriddhi Yojana for your daughter’s financial well-being.

By doing so, you create a financial safety net for yourself and empower your daughter with the means to pursue her dreams and aspirations without the burden of financial constraints.


Gratuity is an essential component of an employee’s financial well-being, serving as a valuable source of retirement savings. Understanding the basics of gratuity calculation and its tax implications is crucial for employees to make informed financial decisions.

Moreover, while securing your retirement is important, don’t forget about the financial future of your loved ones. Government schemes like the Sukanya Samriddhi Yojana offer an excellent opportunity to invest in your daughter’s future. By combining gratuity and SSY, you can create a comprehensive financial plan that ensures a secure retirement for yourself and a bright future for your child.

In summary, gratuity and schemes like Sukanya Samriddhi Yojana play vital roles in securing both your retirement and your daughter’s future. As you navigate your financial journey, consider these tools to build a solid financial foundation that provides peace of mind and financial security for you and your loved ones.

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