What Gratuity Is
Gratuity is a one-time, lump-sum payment made by an employer to an employee as a token of appreciation for continuous, long-term service — typically paid when an employee retires, resigns after qualifying service, or in certain other circumstances defined by law (such as death or disability, where minimum service conditions may not apply).
General Eligibility Conditions
Gratuity, under India’s Payment of Gratuity Act, generally requires an employee to have completed a minimum period of continuous service with the same employer (commonly cited as 5 years, with specific exceptions such as death or disablement) before becoming eligible on leaving the organisation. Eligibility conditions and coverage can have exceptions and sector-specific nuances, so confirming your specific situation against the current law (or with your employer’s HR/legal team) is important rather than assuming a blanket rule applies.
The Standard Calculation Formula
For employees covered under the Payment of Gratuity Act, the commonly used formula is: Gratuity = (Last drawn monthly salary × 15 × number of years of service) / 26, where "salary" here typically refers to basic pay plus dearness allowance, and 26 represents the assumed working days in a month under this formula. Employers not covered under the Act may use a different formula, so confirming which one applies to your employment is worthwhile.
A Simplified Example
An employee with a last-drawn basic + DA of ₹40,000 per month and 10 completed years of service would have a gratuity roughly calculated as: (40,000 × 15 × 10) / 26 ≈ ₹2,30,769. This is illustrative of how the formula works — the actual amount also depends on how "years of service" is rounded (partial years are typically handled by specific rounding rules) and whether any gratuity ceiling under current law applies.
The Gratuity Ceiling and Tax Treatment
Government rules impose a maximum ceiling on the tax-exempt amount of gratuity, and the exact ceiling figure is revised periodically by the government — this guide won’t state a specific current number since it can change, and the correct approach is to check the current ceiling before assuming your full calculated gratuity is exempt from tax. Amounts calculated above the ceiling, or in specific circumstances, may have different tax treatment.