Understanding Gratuity – A Key Retirement Benefit

Gratuity is a lump sum payment made by an employer to an employee as a token of appreciation for services rendered. In India, it is governed by the Payment of Gratuity Act, 1972. Any company with 10 or more employees must pay gratuity to eligible employees who have completed at least 5 years of continuous service.

Gratuity Calculation Formula

The formula used by our calculator is: Gratuity = (15 × Last drawn salary × Years of service) / 26. Here, "Last drawn salary" includes basic salary + dearness allowance (DA). 26 represents the number of working days in a month. For example, if last salary is ₹50,000 and service is 10 years: (15 × 50,000 × 10) / 26 = ₹2,88,461 (approx).

Eligibility Criteria

• Must have completed at least 5 continuous years of service with the same employer.
• Applicable on retirement, resignation, death, or disablement.
• In case of death, 5-year rule is waived – family gets gratuity.

Tax Treatment of Gratuity

• For government employees: Entire gratuity amount is tax-exempt.
• For private sector employees: Least of the following is exempt under Section 10(10): actual gratuity received, 15 days salary × completed years, or ₹20 lakh (maximum limit).
• Any amount above the exempt limit is taxable as salary income.

Important Notes

• Years of service are rounded to the nearest full year. For example, 5 years 6 months is considered 6 years.
• If an employee leaves before 5 years, no gratuity is payable (except death/disablement).
• Employers can offer higher gratuity than the act – but tax exemption still limited to ₹20 lakh.
• For employees not covered under the Act, gratuity is paid as per company policy.

Use our calculator to estimate your gratuity amount and plan your retirement. Keep your appointment letter and salary slips for reference. For exact calculation, consult your HR department.