What is Gratuity?
Gratuity is a statutory benefit paid by employers to employees as a token of appreciation for their long-term service. It's governed by the Payment of Gratuity Act, 1972, and is payable when an employee completes 5 years of continuous service or upon retirement, resignation, or death.
Key Features of Gratuity:
- Mandatory benefit for employees with 5+ years of service
- Calculated based on last drawn salary and years of service
- Tax-free up to ₹20 lakhs (as per latest amendments)
- Paid by employer without employee contribution
- Protected under labor laws
Gratuity Calculation Formula
The gratuity calculation follows a specific formula:
Formula: Gratuity = (Basic Salary + DA) × Years of Service × 15/26
Where:
- Basic Salary + DA: Last drawn basic salary plus dearness allowance
- Years of Service: Total years of continuous service (fraction of year >6 months counts as 1 year)
- 15/26: Fixed multiplier (15 days salary for each year of service)
Example: If your basic salary is ₹50,000, DA is ₹10,000, and you've worked for 10 years: Gratuity = (₹50,000 + ₹10,000) × 10 × 15/26 = ₹3,46,154
Eligibility and Conditions
To be eligible for gratuity, you must meet certain conditions:
- Minimum Service: 5 years of continuous service
- Service Completion: Service can be continuous or with breaks not exceeding 6 months
- Employment Status: Must be an employee (not contractor or consultant)
- Organization Coverage: Employer must have 10+ employees (for private sector)
When Gratuity is Payable:
- On retirement
- On resignation after 5 years
- On termination (except for misconduct)
- On death or disablement
- On superannuation
Tax Implications
Understanding tax implications is crucial for gratuity planning:
- Tax-Free Limit: Gratuity up to ₹20 lakhs is tax-free (as per Finance Act 2023)
- Excess Amount: Amount above ₹20 lakhs is taxable as per income tax slab
- Government Employees: No upper limit for government employees
- Form 16: Gratuity amount is reflected in Form 16
Tax Planning Tips:
- Plan your retirement timing to optimize tax benefits
- Consider spreading gratuity payment across financial years
- Keep proper documentation for tax filing
- Consult a tax advisor for complex situations