What is Gratuity?
Gratuity is a lump-sum payment made by an employer to an employee as a token of gratitude for the services rendered over the years. It is governed by the Payment of Gratuity Act, 1972, and is payable upon retirement, resignation (after 5+ years), or death/disablement.
Organisations with 10 or more employees are required to pay gratuity. The maximum gratuity amount exempt from tax is ₹20 lakh (for non-government employees).
Gratuity Calculation Formula
Gratuity = (15 × Last Drawn Salary × Years of Service) / 26
Where:
Last Drawn Salary = Basic Pay + Dearness Allowance (DA)
26 = Working days in a month (as per the Act)
15 = 15 days of salary for each year of service
Note: Maximum payable gratuity = ₹20,00,000
Eligibility Conditions
- Minimum 5 years of continuous service with the same employer.
- Applicable upon retirement, resignation, death, or disablement.
- In case of death or disablement, the 5-year minimum is waived.
Tax Treatment of Gratuity
- Government employees: Fully tax-exempt.
- Non-government employees covered under the Act: Exempt up to ₹20 lakh.
- Non-government employees not covered under the Act: Exempt based on a different formula.
