What is Gratuity?
Gratuity is a monetary benefit paid by an employer to an employee as a token of appreciation for their long and continuous service to the organization. In India, it is governed by the Payment of Gratuity Act, 1972.
Who is Eligible for Gratuity?
An employee is typically eligible for gratuity if they have completed at least 5 years of continuous service with the same employer. However, this 5-year rule is waived in case of death or disablement of the employee.
How is it Calculated?
The gratuity calculation is based on your last drawn salary (Basic pay + Dearness Allowance) and the number of years you have worked. The law assumes 26 working days in a month and provides for 15 days of salary for every completed year of service.
- Service Years: If you have worked for more than 6 months in your final year (e.g., 5 years and 7 months), it is rounded up to the next year (6 years).
- Taxation: For private sector employees, gratuity up to ₹20 Lakhs is exempt from income tax (as per current 2026 norms).
Did You Know?
If your organization is not covered under the Gratuity Act, you might still receive gratuity, but the calculation formula and tax exemptions might differ slightly. Always check your offer letter or HR policy.