What is Gratuity?
Gratuity is a lump sum payment made by an employer to an employee as a token of appreciation for the services rendered. In India, it is governed by the Payment of Gratuity Act, 1972. It is payable to employees on resignation, retirement, death, or disablement after completing a minimum of 5 years of continuous service.
Gratuity Formula in India
For organisations covered under the Gratuity Act:
Gratuity = (Last Basic Salary × 15 × Years of Service) ÷ 26
For organisations NOT covered under the Gratuity Act:
Gratuity = (Last Basic Salary × 15 × Years of Service) ÷ 30
Here, 26 represents the number of working days in a month, and 15 represents half a month's salary for each year of service.
Key Rules to Know
✅ Minimum eligibility: 5 years of continuous service
✅ Maximum gratuity: No upper limit on amount (but tax exemption capped at ₹20 lakh)
✅ Tax exemption: Up to ₹20 lakh is fully tax-free for private sector
✅ Partial year rule: If you have served more than 6 months in the last year, it is rounded up to the next year
✅ Payment timeline: Employer must pay gratuity within 30 days of it becoming payable
Frequently Asked Questions
What is the minimum service period to get gratuity?
You must complete a minimum of 5 years of continuous service with the same employer to become eligible for gratuity. The 5-year rule is relaxed in case of death or disablement — gratuity is paid to nominees even if service is less than 5 years.
Is gratuity taxable in India?
Gratuity received up to ₹20 lakh is fully tax-exempt for private sector employees covered under the Payment of Gratuity Act. Government employees receive full exemption with no limit. Any amount above ₹20 lakh is added to your income and taxed as per your income tax slab.
Can gratuity be forfeited by the employer?
Yes, an employer can forfeit gratuity if the employee is terminated due to wilful omission, damage to property, or moral turpitude. However, partial forfeiture is allowed only for the extent of damage caused. The employer cannot forfeit the entire gratuity without valid reason.
How is gratuity calculated if I resign after 10 years and 7 months?
Since you have served more than 6 months in the 11th year, it is rounded up. So your gratuity will be calculated as 11 years of service, not 10. This is called the "rounding up" rule under the Gratuity Act.
Does the employer contribute to gratuity separately?
Gratuity is paid entirely by the employer — there is no deduction from the employee's salary for gratuity. Many companies take a Group Gratuity Insurance policy to fund this liability. The annual gratuity provisioning may appear in your CTC, but the actual payment is made by the employer at the time of separation.