Gratuity Calculation in Nepal | Rules, Eligibility & Payment

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including formula, eligibility, tax rules, and employer obligations.
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Gratuity Calculation in Nepal: Understanding
Employee Benefits
Gratuity Calculation in Nepal is a well defined process laid out by the Labour Act, 2074. All
the organized employers in Nepal are required to establish the fund for Gratuity for the
employees on completion of their continuous service. However, lots of staff members are not
aware of how this advantage is computed. This is where many people get confused, as they
equate provident fund contributions, bonuses or other retirement benefits with gratuity. In
fact, gratuity is a separate and required payment that is directly related to years of service
and final salary. If the employer does not get this right, they're liable to legal penalties, labour
conflicts, and damage to their reputation within their employees.
At the same time, if employees are aware of their rights they will be able to make long-term
financial arrangements with greater confidence. This article explains the legal basis, the
specific calculation, the qualifying requirements and the tax consequences after the gratuity
payment is made. If you're a business owner, a HR manager or simply a worker with an
interest in your dues, this breakdown will explain the numbers. We will also examine the
interplay between gratuity and the Social Security Fund as the labour situation in Nepal has
changed a lot since 2018. At the end, you should have the ability to determine how much
you will need to leave as a tip without having to guess.
What Is Gratuity Under Nepali Labour Law
The lumped sum of payment made to an employee on leaving a job with a minimum service
period is called Gratuity. For those who work in the formal economy, the payment is
regulated by the Labour Act, 2074 and its associated Rules. Employers must make the
payment of a gratuity to an employee to a separate retirement fund or the Social Security
Fund. This means that the funds are safeguarded in the event the company may go out of
business or encounter monetary issues. Gratuity is a separate benefit from the severance
pay, leave encashment and PF withdrawal, and the amounts are paid out all in one at exit
time.
Eligibility Criteria for Gratuity in Nepal
Not all employees are eligible for automatic day-one gratuity. The law provides for a
minimum amount of service before the benefit is payable. If an employee resigns, retires or
is fired without cause, they are entitled to receive the accrued but not earned gratuity.
Permanent employees and contract workers/daily wage employees may have varying

eligibility thresholds. Any HR staff member should record the duration of the service
precisely as disputes can arise if there are any misunderstandings regarding employment
records.
Gratuity Calculation Formula Explained
The usual formula for calculating the gratuity in Nepal involves the basic salary of the
individual in his/her final year of service multiplied by years of service and a fixed multiplier.
Usually, employers calculate the amount to be paid according to the following scheme:
● Last Monthly Basic Pay (Basic Salary)
● Years of Service: Number of completed years (proportional for partial years).
● Rate Multiplier (which changes depending on the period of service - after 5 years,
10 years, 15 years, etc., it will increase)
For instance, a longer length of service will be reflected in a higher multiplier for the
employee with a longer tenure than for the employee with a few years of service. This
multi-level system provides incentives for ongoing investment and disincentives for rotation.
Typically, companies will have internal payroll software or spreadsheets to help automate
this calculation and reduce the risk of manual mistakes.
Role of the Social Security Fund
Many employers have been contributing gratuity amounts directly to the Social Security
Fund (SSF) since the inception of the fund, rather than keeping it in-house. It has
transformed the way gratuities are calculated in Nepal for newer workers. As per SSF, the
contributions are aggregated with provident fund and other social security contributions and
the final portion of the gratuity is paid in accordance with the contribution records. Staff need
to review their own SSF statements from time to time to ensure that correct deposits are
being paid by their employers.
Gratuity Calculation Formula Explained
The tax provisions in Nepal are fairly favorable to the treatment of gratuity received at the
time of separation, depending on how the gratuity is paid. Lump-sum retirement payments
such as gratuity may be eligible for certain special tax exemptions or tax rates that are lower
than regular salary income. It is expected that an employer will report these payments
correctly to the Inland Revenue Department to avoid compliance problems. Tax rules are
subject to change; employees should refer to financial circulars or tax experts for up-to-date
information as rules may be changed as part of the annual budget announcement.
Common Mistakes Employers Make
Many employers calculate the amount of gratuity based on gross salary, rather than basic
salary. Others simply do not adjust the multiplier at a time of a new service-duration bracket.
Others will even withhold gratuity pay beyond the legal settlement time frame. Some of these
mistakes could result in a complaint to the labour office, fines and undesirable conflict over

leaving employees. Having a clear and documented payroll policy can avoid most of these
issues.
Practical Tips for Employees
When an employee receives his/her final settlement, he or she should ask for a detailed
explanation of the amount of money he or she will receive as a gratuity. It is also useful to
keep a copy of any basic salary adjustments throughout the years as this will allow for self
checking of the employer's numbers. Raising the concern with HR before going to the labour
office is typically the quicker resolution route to take if there is a discrepancy. When it comes
to salary negotiations or exit talks, knowing your rights under the Labour Act puts you in a
better position.
Provident Fund Rules and Contribution Rate in Nepal
With that knowledge of the benefit of provident funds, it is only natural that you would want to
know about its contribution as well. If the contributions percentage, withdrawal criteria and
functioning of Employees Provident Fund (EPF) and new social security fund have been
dealt with separately, it would be helpful to provide the employee and employers a complete
picture of the retirement benefit system in Nepal.
Frequently Asked Questions
Is gratuity mandatory for all companies in Nepal?
Most formal-sector employers registered under the Labour Act are required to provide
gratuity, though specific thresholds may apply based on company size and employee
category.
Does gratuity depend on gross salary or basic salary?
Gratuity calculation in Nepal is typically based on the last drawn basic salary, not the total
gross salary including allowances.
Can an employee receive gratuity before completing minimum service years?
Generally, no. A minimum continuous service period is required before gratuity becomes
payable, except in specific cases like death or permanent disability.
How is gratuity different from provident fund benefits?
Provident fund involves regular contributions from both employer and employee, while
gratuity is a separate lump-sum benefit funded primarily by the employer based on tenure.
Is gratuity taxable in Nepal?
Gratuity often receives favorable tax treatment compared to regular income, but employees
should verify current provisions with updated tax guidelines.