Gratuity is included in your CTC as ~4.81% of basic — read how CTC is calculated for the full picture. When leaving a job also check your leave encashment payout and EPF withdrawal options.
Gratuity is a statutory benefit paid to employees as a token of appreciation for their long service. It is governed by the Payment of Gratuity Act, 1972 and applies to establishments with 10 or more employees. Understanding the rules helps you plan when to leave, what to expect, and how it's taxed.
Who is Eligible for Gratuity?
- Employees who have completed 5 years of continuous service with the same employer
- Applicable to all employees — permanent, contractual (if on company payroll), part-time (with qualifying service)
- In case of death or disability, gratuity is paid regardless of years of service — even if less than 5 years
- In case of retrenchment, gratuity is payable if service is 5+ years
- Establishments with 10 or more employees must pay gratuity (once crossed, the Act continues to apply even if headcount falls below 10)
The 4 Years 240 Days Rule — Important Exception
Gratuity Calculation Formula
The Payment of Gratuity Act specifies the following formula:
Where: 15 = 15 days of salary per year of service | 26 = working days in a month | DA = Dearness Allowance (0 for most private sector employees)
Important rules for years of service calculation:
- Fractions of a year: if the last year has more than 6 months, it is rounded up to a full year. Less than 6 months is ignored.
- For example: 7 years and 8 months = 8 years of service. 7 years and 4 months = 7 years of service.
Gratuity Examples — Real Calculations
| Basic Salary | Years of Service | Gratuity Amount |
|---|---|---|
| ₹30,000/month | 5 years | ₹30,000 × 15 × 5 ÷ 26 = ₹86,538 |
| ₹50,000/month | 8 years | ₹50,000 × 15 × 8 ÷ 26 = ₹2,30,769 |
| ₹80,000/month | 12 years | ₹80,000 × 15 × 12 ÷ 26 = ₹5,53,846 |
| ₹1,50,000/month | 20 years | ₹1,50,000 × 15 × 20 ÷ 26 = ₹17,30,769 |
| ₹2,00,000/month | 25 years | ₹2,00,000 × 15 × 25 ÷ 26 = ₹28,84,615 → capped at ₹20,00,000 |
Maximum Gratuity Limit
The Payment of Gratuity Act caps the maximum gratuity at ₹20 lakh for employees covered under the Act. Many large companies pay gratuity beyond this cap as part of their HR policy — but only the ₹20 lakh is tax-exempt (see below). The government has been discussing raising this limit further.
For government employees and employees not covered under the Act, there is no statutory cap — gratuity is based on the employer's own rules.
See how gratuity fits into your total CTC
Gratuity provision is ~4.81% of basic included in your CTC
Tax on Gratuity — Section 10(10)
| Employee Category | Tax-Exempt Amount | Taxable Portion |
|---|---|---|
| Government employees (Central, State, Defence) | Fully exempt — no limit | Nil |
| Private sector — covered under Gratuity Act | Least of: actual gratuity, ₹20 lakh, or 15 days' salary × years of service | Gratuity above ₹20 lakh |
| Private sector — not covered under Gratuity Act | Least of: actual gratuity, ₹20 lakh, or half month's average salary × years | Gratuity above ₹20 lakh |
For most private sector employees whose gratuity is below ₹20 lakh, the entire amount is tax-free. If gratuity exceeds ₹20 lakh, the excess is added to your income and taxed at your slab rate in the year of receipt.
When Must the Employer Pay Gratuity?
Under the Payment of Gratuity Act:
- Gratuity must be paid within 30 days of it becoming payable (on the last working day or within 30 days of resignation acceptance)
- If not paid within 30 days, the employer must pay simple interest on the outstanding amount from the due date
- If employer refuses to pay, you can file a complaint with the Controlling Authority under the Gratuity Act — typically the Labour Commissioner of your state
- Willful non-payment is punishable with imprisonment (6 months to 2 years) and/or fine
Can Gratuity Be Forfeited?
Yes — under Section 4(6) of the Payment of Gratuity Act, gratuity can be partially or wholly forfeited if the employee is terminated for:
- Willful omission or negligence causing damage or loss to the employer's property
- Riotous or disorderly conduct or any other act of violence on the employer's premises
- An offense involving moral turpitude
Normal resignation, retirement, or performance-based exit does not forfeit gratuity. Only dismissal for proven misconduct qualifies. The forfeiture must be proportionate to the loss caused.