What Is Gratuity? Complete Guide for Employees
Gratuity is a monetary benefit given by employers to employees as a token of appreciation for services rendered. In India, it's governed by the Payment of Gratuity Act, 1972.
Eligibility
You're eligible for gratuity if: You've completed 5+ years of continuous service (4 years and 240 days counts as 5 years). You're leaving due to resignation, retirement, death, or disability. The organization has 10+ employees.
Calculation Formula
Gratuity = (15 × Last Drawn Salary × Years of Service) / 26. Last Drawn Salary = Basic + DA. Years are rounded: 4 years 7 months = 5 years. Maximum gratuity: ₹20 lakh (tax-exempt under current rules).
Tax Treatment
For government employees: Fully exempt from tax. For private employees covered under the Act: Exempt up to ₹20 lakh. The exemption is the least of: Actual gratuity, ₹20 lakh, or formula-calculated amount.
Important Points
1) Gratuity is payable within 30 days of becoming due. 2) An employee can be forfeited gratuity for willful misconduct causing damage. 3) Nominee must be declared. 4) Gratuity is often part of CTC. 5) No employer contribution from employee's salary.