Gratuity is a thank-you payment from your employer for long service, paid when you resign, retire or are laid off after the qualifying period. For someone with ten years at one company it can easily be three to five months of basic pay.
What gratuity is
The Payment of Gratuity Act, 1972 covers establishments with ten or more employees. Covered employers must pay gratuity by the statutory formula; others may pay under their own policy, often using a slightly lower formula.
The formula
| Employer type | Formula |
|---|---|
| Covered by the Act | 15 × last drawn (basic + DA) × years of service ÷ 26 |
| Not covered | 15 × average (basic + DA) of last 10 months × completed years ÷ 30 |
Why 26? The Act treats a month as 26 working days, so 15 ÷ 26 is fifteen days’ wages for every year of service.
Worked example
Last drawn basic + DA ₹60,000, service 10 years 7 months at a covered employer. Service above six months rounds up, so years = 11. Gratuity = 15 × 60,000 × 11 ÷ 26 ≈ ₹3,80,769. Had the service been 10 years 5 months, it would round down to 10 years: about ₹3,46,154.
Who qualifies
- Five years of continuous service with the same employer is the usual condition.
- The five-year condition does not apply on death or disablement.
- Under the Code on Social Security, fixed-term employees qualify after one year; check how your employer has applied the new labour codes.
- Notice period counts towards service. Unpaid long leave may not, depending on the employer’s records.
Tax on gratuity
Government employees get gratuity fully tax-free. For private-sector employees, the exempt amount is the lowest of three numbers: the gratuity actually received, the formula amount, and ₹20 lakh. Anything above that is taxed as salary.
₹20 lakh is a lifetime limit
The ₹20 lakh exemption applies across all the gratuity you receive in your career, not per employer.
Gratuity in your CTC
Many offer letters include gratuity as roughly 4.81% of basic (15 ÷ 26 ÷ 12). That money is not paid monthly and you only get it if you stay five years, so do not count it as take-home when comparing offers.
Calculators for this guide
Finkoin tip
Enter your basic, DA and years of service in the gratuity calculator to see the amount and the tax-free part.
Try it on Finkoin →FAQs
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