Gratuity is a statutory reward for long service — a lump sum an employer pays when an employee leaves after completing five years. It is governed by the Payment of Gratuity Act.
This guide explains eligibility, the calculation and the tax treatment.
What is Gratuity?
Under the Payment of Gratuity Act, an employee who completes five years of continuous service is entitled to gratuity on resignation, retirement or death/disablement (where the five-year rule is relaxed).
The formula is: last drawn basic + DA × 15/26 × years of service.
| Eligibility | 5 years of continuous service |
|---|---|
| Formula | Basic + DA × 15/26 × years of service |
| Tax exemption | Up to the prescribed limit |
| Governed by | Payment of Gratuity Act, 1972 |
Example
Frequently asked questions
Is 5 years mandatory for gratuity?
Generally yes, except in cases of death or disablement, where the five-year condition is waived.
Is gratuity taxable?
Gratuity is exempt up to a prescribed limit; amounts above that are taxable.