Gratuity

Finance

Gratuity is a lump-sum payment an employer gives to an employee when they leave, as a reward for long and continuous service. In India it is governed by the Payment of Gratuity Act, 1972, and is typically received after completing at least 5 years of continuous service — the standard qualifying period for most employees, with some limited exceptions like death or disability.

How it is calculated

For employees covered by the Act, the formula divides the last drawn basic salary plus dearness allowance into a per-day figure and multiplies by completed years of service:

Gratuity = Last drawn (basic + DA) × completed years × 15 ÷ 26

The 15 represents a half month's wage for each completed year (using the 26 working-day convention), so each completed year earns roughly half a month's pay. Many employers also offer gratuity to staff not covered by the Act, but the statutory formula gives a useful baseline regardless.

Tax treatment

A key point is that not all gratuity is taxable. For non-government employees, the amount received is tax-exempt up to the lowest of:

The actual gratuity received,
The amount computed by the statutory 15/26 formula, or
The government-set upper cap (increased over time, e.g. from ₹10 lakh to higher limits).

Only the portion above that exemption is added to your taxable income — which matters because gratuity forms part of your overall cost-to-company package. The exact cap and applicability can change with annual budgets, so confirm the current limits before relying on a figure.

Eligibility nuances

The 5-year rule is the headline, but it is not absolute:

Death or disability — gratuity becomes payable even without 5 years of service.
Continuous service — the clock is generally measured in continuous years, though the Act provides that certain breaks may be treated as continuous, and it can also be relevant for intermittent engagements in a few cases.
Apprentices and some others may be excluded, and coverage can differ depending on whether the employer falls within the Act's size threshold.

Because gratuity is computed on last-drawn basic plus DA, the largest gratuities go to those who earn their highest basic late in their career — one reason pay structures and increments matter.

A quick example

An employee who last drew a basic of ₹40,000 and completes 12 years of service would compute gratuity as:

40,000 × 12 × 15 ÷ 26 ≈ ₹2,76,923

Estimate your entitlement with the Gratuity Calculator.