Gratuity

Salary & HR

Gratuity is a retirement benefit paid by an employer to an employee as appreciation for long service. It is payable when an employee completes a minimum of 5 years of continuous service and leaves -- whether on retirement, resignation, or death or disability.

In detail

Governed by the Payment of Gratuity Act 1972, applicable to establishments with 10+ employees. Calculation uses last drawn salary (basic + DA) and years of service.nnTax: up to Rs 20 lakh is exempt from income tax for private sector employees. Government employees receive completely tax-free gratuity. Amounts above Rs 20 lakh are taxed as income.nnThe 5-year rule is waived in cases of death or disability -- the nominee or legal heir receives the full amount regardless of service duration.

Formula

Gratuity = (Last drawn Basic + DA) x 15/26 x Number of years 15/26 = 15 days salary per year (26 working days per month) Fraction of year: 6+ months counts as a full year Example: Basic Rs 80,000/month, 18 years service: Gratuity = (80,000 x 15/26) x 18 = Rs 8,30,769 (tax-free)

Real-life example

🇮🇳 India example

Rajesh has worked 18 years. Last drawn basic + DA = Rs 80,000/month. Gratuity = (80,000 x 15/26) x 18 = Rs 8.31 lakh. Since below Rs 20 lakh, entirely tax-free. Had he resigned at 4.5 years, he would receive nothing -- the 5-year minimum is strict for voluntary resignation.

Frequently asked questions

Is gratuity payable if I resign before 5 years? ▼

Generally no, for voluntary resignation. However some companies have policies of paying after 4.5 years, treating it as 5 years. Death or permanent disability before 5 years entitles the nominee to full gratuity regardless of tenure.