Gratuity
Gratuity is a statutory lump-sum benefit paid by an employer to an employee as a token of appreciation for continuous service, governed by the Payment of Gratuity Act, 1972. It is payable on retirement, resignation, death, disablement, or termination, provided the employee has completed at least 5 years of continuous service (this condition is waived in case of death or disablement).
For employees covered under the Act, gratuity is calculated using the formula: (Basic + DA) × 15/26 × number of years of service. Gratuity received is tax-exempt up to ₹20 lakh for private-sector employees under Section 10(10), while government employees enjoy full exemption.
Key points
- ✓ Requires a minimum of 5 years of continuous service (waived for death/disablement)
- ✓ Formula: (Last drawn Basic + DA) × 15/26 × completed years of service
- ✓ Tax-exempt up to ₹20 lakh for private-sector employees under Section 10(10)
- ✓ Applies to establishments with 10 or more employees under the Payment of Gratuity Act
- ✓ Employers may fund gratuity via an approved gratuity trust or LIC group gratuity scheme
Example
An employee with a last-drawn (Basic + DA) of ₹40,000 who completes 8 years of service is entitled to gratuity of ₹40,000 × 15/26 × 8 = ₹1,84,615, which is fully tax-exempt since it is well below the ₹20 lakh limit.
Frequently asked questions
Is gratuity payable before 5 years of service?
Is gratuity part of CTC?
How can I quickly calculate my gratuity amount?
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