What is gratuity?
Gratuity is a statutory retirement benefit paid to employees after 5 years of continuous service, calculated on last-drawn basic wages.
Gratuity is a lump-sum payment that an employer makes to an employee as a token of gratitude for long service. It is a statutory benefit under the Payment of Gratuity Act, 1972. Employees who have completed 5 years of continuous service are eligible when they resign, retire or are retrenched. Gratuity is also payable in case of death or disability, even before 5 years.
The formula for gratuity is:
(Last drawn basic salary + Dearness allowance) × 15 × Number of completed years of service / 26
The calculation uses 26 working days in a month, not 30 or 31. The gratuity amount is capped at ₹20 lakh. Employers can choose to pay more, but the statutory formula ceiling is ₹20 lakh. The exemption for tax purposes is the least of the actual gratuity received, ₹20 lakh, or 15 days' salary for each completed year of service.
The five-year rule does not apply in case of death or disability. In these situations, the nominee receives the calculated gratuity regardless of completed years. Payment must be made within 30 days of becoming due; otherwise, simple interest is payable on the delayed amount.
Worked example
An employee with a last-drawn basic of ₹30,000 and 6 years of service resigns.
| Item | Calculation | Amount | |---|---|---| | Last drawn basic | ₹30,000 | ₹30,000 | | Completed years | 6 | 6 | | Gratuity | ₹30,000 × 15 × 6 / 26 | ₹1,03,846 |
The employee receives ₹1,03,846, which is well within the ₹20 lakh cap.
Related reading
Use the gratuity calculator or read the employee exit and settlement guide.
Frequently asked questions
- Who is eligible for gratuity?
- Employees covered by the Payment of Gratuity Act after 5 years of continuous service, or on death or disability.
- Is gratuity taxable?
- Gratuity received by a government employee is fully tax-free. For private sector employees, it is exempt up to the least of ₹20 lakh, 15 days' salary for each year, or actual gratuity.
- What is the maximum gratuity amount?
- The statutory ceiling under the Payment of Gratuity Act is ₹20 lakh. Employers can pay more but the exemption is capped.