Is gratuity calculated only on basic salary?

No, gratuity is not calculated only on the basic salary. As per the Payment of Gratuity Act, 1972, gratuity is calculated on the basis of an employee's last drawn salary, which includes basic salary and dearness allowance. The Act specifies that for gratuity, 'wages' shall mean all emoluments (payment) earned by an employee while on duty, including basic pay, dearness allowance and commission if the terms of employment include commission as a fixed percentage of turnover.

Gratuity Amount = Y x S x 15/26

Where,

• Y stands for the number of years of continuous service in the organisation,
• S stands for the last drawn salary, which includes basic salary and dearness allowance (DA).

Dearness allowance is provided to employees by organisations to offset inflationary costs. Any other allowances, such as house rent, bonuses, overtime pay, etc., are not factored into the gratuity calculation. Only basic pay and dearness allowance are considered. This formula is common across private and government institutions. The final gratuity amount is computed at the rate of 15 days' wages for every completed year of service, subject to a maximum cap as prescribed under law. Therefore, gratuity takes into account both basic salary and dearness allowance and not just the basic pay alone.