How gratuity works
Gratuity is a lump-sum benefit paid to employees as a reward for long service, governed by the Payment of Gratuity Act, 1972. It is paid on retirement, resignation (after 5+ years), death or disability. Employers contribute roughly 4.81% of basic salary every month towards a gratuity fund.
Gratuity formula
- Covered under Act: Gratuity = (Last Basic + DA) × 15 ÷ 26 × Years of service
- Not covered: Gratuity = (Last Basic + DA) × 15 ÷ 30 × Years of service
Worked examples
| Last Basic + DA | Years | Gratuity |
|---|---|---|
| ₹40,000 | 5 | ₹1,15,385 |
| ₹60,000 | 10 | ₹3,46,154 |
| ₹80,000 | 15 | ₹6,92,308 |
| ₹1,00,000 | 20 | ₹11,53,846 |
| ₹1,50,000 | 25 | ₹21,63,461 (₹20L exempt + ₹1.6L taxable) |
Taxation
Gratuity is tax-exempt up to ₹20,00,000 (lifetime limit, Sec 10(10)). Anything above this amount is taxed as salary income. Government employees enjoy 100% exemption.