How to calculate gratuity for private-sector employees?

About How to calculate gratuity

Gratuity, a business content, is a benefit or sum of money given to an employee voluntarily by the employer for their services or contribution to the company. It is a kind of appreciation for the employee or addition to the salary or regular wages that the employee is taking. Gratuity does not come under most employment laws hence is also a discretionary payment. 

The employees receive gratuity during holidays, on some special occasions, at the time of work anniversaries, or on exceptional performance. The gratuity can be given in many different forms like cash, company stock, gift cards, paid vacations, or other perk benefits. The gratuity is distributed as per the company’s policy, its financial position, and the performance of the employees. 

Note, gratuity is altogether different from statutory benefits that are legally mandated in employment laws, while gratuity is a gift for the employee’s performance or a token of appreciation. The gratuity varies from company to company, from region to region, and even from country to country. Each company or country has its own ways of providing gratuity to its employees. 

Calculating Private-Sector Gratuities

As you already know, gratuity varies, and so does its calculation based on many different factors like companies’ or countries’ policies, financial health, performance, and more. However generally for the private sector gratuity is calculated after keeping Checking Labour Laws and Employee Eligibility Period in view.

  • Checking Labour Laws: to understand the gratuity calculation one needs to know about the exact formula and eligibility criteria as per the law of the country. Once you understand the exact formula you can easily calculate the gratuity for private sector employees, hence first of all it’s important to check the applicable labor laws. 
  • Employee Eligibility Period: Another thing that needs to be kept in view is the employee service period as gratuity is generally calculated on the basis of the service period of an employee. Gratuity is probably given to employees after completing a certain period in a company. 

The common formula for calculating gratuity amount depends upon the basic salary of the employee and his/her service years period. Hence the common method of calculating gratuity amount is based on the following formula: 

(Basic salary × Number of service years× Gratuity rate) / Divisor

In the above formula, Basic Salary is the basic wage that the employee is taking, it excludes additional payments like allowances, bonuses, and other incentives. 

The number of Service Years is the total service period that the employee has given to the company or employer. 

The gratuity Rate is nothing but simply a percentage rate or fraction that comes under the labor laws. This fraction is of the basic salary of the employee. 

Remaining the Divisor, it’s a number that is fixed by the labor law of the country, it can either be 12 or 26. 

Example calculation: Let’s assume a gratuity rate of 15%, a basic salary of $2,000, and 8 years of service. If the divisor is 12, the calculation would be as follows:

Let’s take an example to help you in understanding this calculation method

If the Gravity Rate is 15%, the employee’s Basic Salary is Rs 2,000 the Service Period is 8 years and the Divisor is 12, therefore in such a case the calculation would be 

(2,000 x 8 x 15%) / 12 = 2,000

Hence the Gratuity rate is Rs 2000. 

(Note, this calculation can vary as per the company policy or rules of the region hence one needs to consult labor laws or can consult any professional in case of some difficulty.

Gratuity Calculation Importance 

Gratuity calculation is very significant as it’s a financial benefit for the workers or the employees working in the company, it’s of great importance for both employers and employees as it acts as a proof of healthy financial background for the employers and benefit for employees at the time of their retirement, task accomplishments over a certain period, resignation and more. Mentioned below are the importance of gratuity calculation: 

Motivation and Commitment: with the help of gratuity employees can remain motivated and committed to their work and for the company. It acts as a financial cushion for a longer period in response to the services of the employees hence encouraging loyalty and dedication among the employees of any organization. It also promotes stability and employee retention and helps in the motivation of the employees as they receive the gratuity at the end of their tenure. 

Financial Security: it’s financial security for the future of the employees at the time of their retirement or in case they resign from the company. It helps to secure the future of the employees as it covers their expenses, funds for other investments, and other retirement purposes.

Company Image and Branding: gratuity offering helps to enhance the image of the company and strengthen the employer’s branding reputation. The Gratuity program helps in showing the employees value and their financial stability. This step can help to generate talented employees and can help contribute to a positive work environment. 

ReadMore: What is Goods and Service Tax and How is it calculated?


Gratuity Calculation is important for the financial promotion and security of the employees. This component plays an important role in maintaining the positive relationship between employers and employees. With the help of gratuity calculation, one can easily understand how much his or her is financially secure and this can also help a company to understand their financial stability. 


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