What is Gratuity?
Gratuity is a lump sum amount paid by an employer to an employee as a token of appreciation for services rendered over a long period. Under the Payment of Gratuity Act, 1972, gratuity is payable to employees who have completed at least 5 years of continuous service, upon resignation, retirement, death, or disablement.
Gratuity is one of the three retirement benefits (along with PF and pension) that provide financial security to employees. For many private sector employees, gratuity forms a substantial portion of their terminal benefits — often running into lakhs for those with 15-20+ years of service.
Gratuity Calculation Formula
For employees covered under the Payment of Gratuity Act:
Gratuity = (Last Drawn Salary × 15 × Years of Service) / 26
Where Last Drawn Salary = Basic Pay + Dearness Allowance. The factor 15 represents 15 days’ wages, and 26 represents working days in a month.
| Years of Service | Basic + DA ₹50,000/month | Basic + DA ₹1,00,000/month |
|---|---|---|
| 5 years | ₹1,44,231 | ₹2,88,462 |
| 10 years | ₹2,88,462 | ₹5,76,923 |
| 15 years | ₹4,32,692 | ₹8,65,385 |
| 20 years | ₹5,76,923 | ₹11,53,846 |
| 30 years | ₹8,65,385 | ₹17,30,769 |
Tax Treatment of Gratuity
For government employees, the entire gratuity amount is tax-free. For private sector employees covered under the Gratuity Act, the least of the following is exempt from tax: actual gratuity received, ₹20,00,000 (maximum limit as per 2019 amendment), or gratuity calculated using the formula. Any amount exceeding the exempt portion is taxed as salary income in the year of receipt.
Who is Eligible for Gratuity?
The Payment of Gratuity Act applies to every establishment with 10 or more employees. To be eligible, an employee must complete 5 continuous years of service. However, in cases of death or disablement, the 5-year condition is waived. The Supreme Court has ruled that 4 years and 240 days of service is treated as 5 years for gratuity eligibility.
Gratuity for Private Sector Employees
Many private companies show gratuity as a CTC component. The employer contribution towards gratuity is typically 4.81% of basic salary (15/26 × basic/12 months). While this amount is accrued monthly, it’s only paid as a lump sum upon separation after 5 years. If you leave before 5 years, you forfeit the accumulated gratuity in most cases.
Is gratuity part of CTC?
Yes, most companies include gratuity as a component of CTC (Cost to Company). The annual employer contribution is approximately 4.81% of your basic salary. However, since it’s only payable after 5 years of service, leaving earlier means this component was never actually paid to you — effectively reducing your real compensation during that period.
What happens to gratuity if I resign before 5 years?
Under the Payment of Gratuity Act, you forfeit your gratuity if you resign before completing 5 years. The employer is not legally obligated to pay. However, some companies voluntarily pay pro-rata gratuity or have policies that pay after 1-3 years as a retention tool. Check your company’s HR policy or employment contract.
Can an employer deny gratuity?
An employer can forfeit gratuity (partially or wholly) only if the employee is terminated for: moral turpitude, or riotous/violent behavior causing damage to employer’s property. Beyond these two grounds, forfeiture is illegal. If an employer wrongfully denies gratuity, the employee can file a complaint with the Controlling Authority under the Gratuity Act.
Is the ₹20 lakh gratuity limit for each employer?
Yes, the ₹20 lakh tax exemption limit applies separately for each employer. If you receive ₹15 lakh from one employer and ₹12 lakh from another (at different times in your career), each amount is independently evaluated against the ₹20 lakh limit. You don’t need to aggregate gratuity from different employers.