Glossary
What is gratuity?
What gratuity is, who qualifies, and how the 15 days' wages per year formula works on a real employee's last drawn pay.
Updated
In short
Gratuity is a lump sum paid to an employee who leaves after five years' service, or one year on a fixed-term contract, worked out from last drawn wages. SimpleERP does not compute it; you add it to the final payslip.
Gratuity is a lump sum an employer pays an employee on leaving, retiring or death, for long service. Under the Code on Social Security 2020, formerly the Payment of Gratuity Act, it is 15 days' wages for each completed year, due after five years of continuous service, or one year for a fixed-term employee. Wages are last drawn Basic and dearness allowance, divided by 26. Check the current rules.
Gratuity: a worked example
Selvam P, fitter at Lakshmi Steel Furnitures, leaves in October 2026 after 7 completed years. His last drawn Basic is ₹16,000 and there is no dearness allowance.
| Step | Working | Amount |
|---|---|---|
| One day's wages | ₹16,000 ÷ 26 | ₹615.38 |
| 15 days' wages | ₹16,000 × 15 ÷ 26 | ₹9,230.77 |
| Gratuity for 7 years | ₹9,230.77 × 7 | ₹64,615.38 |
FAQ
Questions, answered
Who is eligible for gratuity?
Gratuity is due to employees of establishments with ten or more employees, under the Code on Social Security 2020 as notified, after five years of continuous service. A fixed-term employee qualifies after one year, pro rata. The service condition does not apply on death or disablement. Check the current rules for your business.
How is gratuity calculated?
Last drawn Basic plus dearness allowance, multiplied by 15, divided by 26, multiplied by completed years of service. Part years above six months are usually rounded up to a full year. The amount is subject to a ceiling, as notified.
Does SimpleERP calculate gratuity?
SimpleERP does not calculate gratuity. Gratuity is not a seeded component and there is no year-end provision. Work out the amount, then add it to the final payslip as an Other earning line, or record a provision and the payment with manual journals if your accountant keeps one.
Is gratuity part of CTC?
Some employers include the yearly accrual of gratuity, about 4.81% of Basic, in the CTC they quote. Others leave it out. Either is fine as long as the offer letter says which.
Related
Keep reading
Full and final settlement
The last payment to a leaving employee: salary to the last day, plus dues such as encashment and gratuity, less recoveries.
Read moreCTC (cost to company)
Cost to company: gross pay plus the employer's contributions, usually quoted per year in an offer letter.
Read morePayroll
Salary structures, monthly runs and payslips with PF, PT and TDS, posted to the books.
Read more
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