What Is Gratuity?
Gratuity is a statutory, lump-sum monetary benefit paid by an employer to an employee as a token of appreciation for continuous long-term service, payable under the Payment of Gratuity Act, 1972 upon retirement, resignation, death, or disablement, subject to eligibility conditions.
Gratuity Eligibility Criteria
An employee generally becomes eligible for gratuity after completing 5 years of continuous service with the same employer, though this eligibility condition is waived in cases of death or disablement, where gratuity becomes payable regardless of the length of service completed.
Gratuity Calculation Formula
For employees covered under the Payment of Gratuity Act: Gratuity = (Last Drawn Basic Salary + DA) × 15/26 × Number of Completed Years of Service. The divisor of 26 represents the typical working days in a month, and 15 represents 15 days' wages for each completed year of service.
Worked Example
An employee with a last drawn Basic Salary (plus DA) of ₹50,000, completing 10 years of continuous service, would be eligible for gratuity of approximately ₹50,000 × 15/26 × 10 = ₹2,88,462 (rounded), subject to the applicable statutory maximum ceiling.
Gratuity Tax Exemption
Gratuity received by employees covered under the Payment of Gratuity Act is exempt from income tax up to a specified maximum limit (periodically revised by the government), with any amount received above this limit being taxable as per applicable income tax provisions.
How HR Software Helps
Payroll and HRMS systems can automatically calculate accruing gratuity liability for provisioning purposes and compute the exact payable amount at the time of an employee's exit, ensuring accuracy and compliance with the statutory formula.
See how Trilliant Software automates this →Gratuity: Frequently Asked Questions
Is gratuity payable if an employee resigns before completing 5 years?
Is there a maximum limit on gratuity payment?
This glossary entry is for general information and reflects common HR practice in India at the time of writing. Statutory thresholds, rates and deadlines change — verify against the latest official notifications or consult a qualified legal or tax advisor before acting.