How Gratuity works
Under the Payment of Gratuity Act, gratuity is 15 days of last-drawn wages for each completed year of service, worked out as (15 ÷ 26) × last monthly basic-plus-DA × years. It becomes payable after five years of continuous service, except in cases of death or disability.
Why Gratuity matters
Gratuity is a statutory right, is provisioned in your CTC each year, and up to ₹20,00,000 of it is tax-free, so it is a meaningful part of long-term pay.
When you qualify and how it is taxed
Gratuity is a lump sum an employer pays for long service, governed by the Payment of Gratuity Act for establishments with 10 or more employees. You become eligible after five continuous years of service, and it is paid on resignation, retirement, or earlier in the case of death or disablement, where the five-year rule is waived. The formula is (last drawn basic plus DA) multiplied by 15/26 for each completed year of service, where 15/26 represents 15 days' wages for every year worked on a 26-day month. On a final basic of Rs 40,000 after 10 years, that is roughly Rs 2,30,000. Gratuity is tax-free up to a lifetime limit of Rs 20,00,000; anything above that is taxable. Employers typically provision for it through the year, which is why it appears as a line inside your CTC even though you receive it only on exit.
Frequently asked questions
Is gratuity paid before 5 years?
Generally no. Five years of continuous service is required, except where employment ends due to death or disability, when it is paid regardless of tenure.
Is gratuity taxable?
Gratuity is exempt from tax up to ₹20,00,000 over your career; any amount above that is taxable as salary.