When you look at your CTC (Cost to Company), one line item often raises questions—Gratuity. What is it, how is it calculated, and most importantly, how does it affect your final take-home or retirement benefits?
In this blog, we’ll break down how gratuity is calculated from CTC, who’s eligible, and what you should know about its financial impact.
What Is Gratuity?
Gratuity is a statutory benefit paid by an employer to an employee as a token of appreciation for their service. It’s governed by the Payment of Gratuity Act, 1972 and becomes payable once you’ve completed at least five years of continuous service with the same employer.
What Is CTC?
CTC (Cost to Company) is the total annual cost a company incurs on an employee. It includes:
- Basic salary
- House Rent Allowance (HRA)
- Provident Fund (PF)
- Performance bonuses
- Gratuity
- Other perks or reimbursements
How Is Gratuity Calculated from CTC?
If gratuity is part of your CTC, it’s typically calculated using this formula (as per the Gratuity Act):
Gratuity = (15 × Last Drawn Basic Salary × Years of Service) / 26
Here’s a breakdown:
- 15 = Days of salary for every completed year of service
- Last Drawn Basic Salary = Includes basic + dearness allowance (if applicable)
- 26 = Number of working days in a month
Example:
Let’s say:
- Your last drawn basic salary = ₹30,000/month
- Total years of service = 6
Gratuity = (15 × 30,000 × 6) / 26 = ₹1,03,846 (approx.)
From a CTC Perspective:
If gratuity is mentioned in your CTC, companies typically allocate 4.81% of your basic salary annually toward gratuity.
Example:
- Basic salary = ₹6,00,000/year
- Gratuity component = 4.81% of ₹6,00,000 = ₹28,860/year
This doesn’t mean you get that amount every year—it’s a lump sum paid only when you resign/retire after 5 years of service.
Is Gratuity Always Included in CTC?
Not always. Some companies include gratuity in the CTC to give a more attractive salary package, while others don’t. Always check your offer letter or salary breakup.
Key Points to Remember
- Eligibility: Minimum 5 years of continuous service (exceptions for death or disability)
- Tax Benefit: Gratuity is tax-exempt up to ₹20 lakhs under current laws (subject to change)
- Private vs. Government Sector: Calculation remains the same but tax exemptions may differ
Quick Tip: Use a Gratuity Calculator
Manually calculating gratuity can be tricky. Use our Gratuity Calculator to instantly find your gratuity amount based on your CTC and years of service.
Final Thoughts
Understanding how gratuity is calculated from your CTC can help you make better career and financial decisions. It’s not just a line in your salary slip—it’s a reward for your loyalty and long-term service.
Plan ahead. Calculate smart. Retire richer.