Gratuity

Gratuity is a lump-sum amount an employer pays to an employee on leaving the company after 5 years of continuous service. It works out to 15 days of last-drawn basic + DA for every completed year of service, under the Payment of Gratuity Act, 1972.

What is Gratuity?

Gratuity is a statutory retirement or exit benefit under the Payment of Gratuity Act, 1972. It applies to establishments with 10 or more employees and is payable on resignation, retirement, death, or disablement after 5 years of continuous service. The 5-year minimum is waived in case of death or disablement.

Formula: Gratuity = (Last drawn Basic + DA) × 15 ÷ 26 × Years of completed service

Example

An employee with last drawn Basic + DA of ₹40,000 and 8 years of service: Gratuity = 40,000 × 15 ÷ 26 × 8 = ₹1,84,615

How Gratuity is used

Gratuity is paid as a one-time payout at exit. Up to ₹20 lakh is tax-exempt. Many employers accrue 4.81% of basic monthly into a gratuity fund (LIC or equivalent) so the obligation is funded.

Gratuity FAQs

Can I claim gratuity before 5 years?

No, except in cases of death or permanent disablement, where the 5-year rule is waived.

Is gratuity taxable?

Gratuity up to ₹20 lakh is tax-exempt for non-government employees. Amounts above are taxed as per slab.

How do I calculate gratuity?

Use the formula: (Last drawn Basic + DA) × 15 / 26 × completed years of service. Round years up if extra months are 6 or more.