What is Gratuity?
Gratuity is a lump sum payment made by an employer to an employee as a token of appreciation for services rendered over the years. It's a retirement benefit governed by the Payment of Gratuity Act, 1972 in India.
Gratuity Eligibility
To be eligible for gratuity, an employee must:
- Have completed at least 5 years of continuous service with the same employer
- Be employed in an organization with 10 or more employees (for Act coverage)
- In case of death or disability, gratuity is payable even before completing 5 years
Gratuity Calculation Formula
The gratuity amount is calculated using the following formula:
For employees covered under the Act:
Gratuity = (Last drawn salary × 15 × Years of service) ÷ 26
For employees NOT covered under the Act:
Gratuity = (Last drawn salary × 15 × Years of service) ÷ 30
Where:
- Last drawn salary = Basic salary + Dearness Allowance (DA)
- 15 = Days of salary for each completed year
- 26 = Average working days per month (covered under Act)
- 30 = Days in a month (not covered under Act)
Example Calculation
Scenario:
• Last drawn salary: ₹50,000 per month
• Years of service: 10 years 6 months
• Employee type: Covered under Gratuity Act
Calculation:
Years of service = 10 + (6/12) = 10.5 years (rounded to 11 years)
Gratuity = (50,000 × 15 × 11) ÷ 26
Gratuity = ₹8,250,000 ÷ 26
Gratuity Amount = ₹3,17,307.69
Important Points
- Maximum Limit: Gratuity is capped at ₹20 lakhs
- Rounding: If months of service are 6 or more, round up to next year
- Tax Exemption: Up to ₹20 lakhs is tax-exempt for eligible employees
- Payment Timeline: Employer must pay within 30 days of becoming due
- Forfeiture: Can be forfeited in case of misconduct or moral turpitude
Tax Treatment of Gratuity
Tax-exempt gratuity amounts:
- Government Employees: Fully exempt (no limit)
- Private Sector (covered under Act): Exempt up to ₹20 lakhs
- Private Sector (not covered): Exempt up to ₹10 lakhs
Any amount above the exemption limit is added to your income and taxed as per your tax slab.
Who is Covered Under Payment of Gratuity Act?
The Act applies to:
- Factories, mines, oilfields, plantations, ports, railways
- Shops or establishments with 10 or more employees
- Educational institutions, hospitals, chambers of commerce
Frequently Asked Questions
Can I get gratuity if I resign before 5 years?
No, you must complete 5 years of continuous service to be eligible for gratuity. Exception: In case of death or disability, gratuity is payable even before 5 years.
Is DA included in gratuity calculation?
Yes, Dearness Allowance (DA) is included in the last drawn salary for gratuity calculation. However, HRA, conveyance, and other allowances are not included.
What if I change jobs?
Gratuity is paid by each employer separately based on years of service with them. Service period doesn't carry forward to the new employer.
How is gratuity different from PF?
PF (Provident Fund) is a monthly contribution-based retirement savings, while gratuity is a one-time payment at the end of service. PF has no minimum service requirement, but gratuity requires 5 years.
Can employer refuse to pay gratuity?
No, payment of gratuity is a statutory right. Employer must pay within 30 days. Refusal or delay attracts penalties and interest.