What Is Gratuity?
Gratuity is a lump-sum payment an employer makes to an employee for continuous long service, governed by the Payment of Gratuity Act, 1972. It is normally payable after five years of service, on resignation, retirement or death, and is calculated from your last drawn salary and years served.
Why gratuity matters
Gratuity is part of your CTC that most people never claim because they do not know it exists or leave a few months before the five-year mark. On a ₹60,000 basic salary, six years of service is roughly ₹2 lakh — genuine money, provided you know the rule.
It also affects when you switch jobs. Leaving at four years and eight months usually forfeits the entire amount; staying a few more months secures it. That single piece of knowledge has been worth lakhs to people who happened to have it.
How gratuity works
For employees covered by the Act, gratuity = (15 × last drawn salary × completed years of service) ÷ 26. "Salary" here means basic pay plus dearness allowance, not your full package, and 26 represents working days in a month. A period beyond six months in the final year counts as a full year — so 6 years 7 months is treated as 7 years.
The five-year condition is waived if service ends due to death or disablement. On death, gratuity is paid to the nominee or legal heir. Tax treatment: for private-sector employees covered by the Act, gratuity is exempt up to the least of ₹20 lakh, the actual amount received, or the amount from the formula — with the ₹20 lakh being a lifetime limit across all employers. Government employees receive it fully exempt.
A real Indian example of gratuity
Sanjay resigns after 6 years and 8 months. Because the extra period exceeds six months, it counts as 7 completed years. His last drawn basic plus DA is ₹60,000.
Gratuity = (15 × 60,000 × 7) ÷ 26 = ₹2,42,308. It is within the ₹20 lakh lifetime limit, so it is fully tax-free. Had he resigned at 4 years and 8 months instead, he would have been eligible for nothing at all.
Benefits
Common mistakes
Best practices
Gratuity vs EPF
| Gratuity | EPF | |
|---|---|---|
| Contributed by | Employer only | Employer and employee |
| Accrues | After 5 years of service | From your first month |
| Based on | Last salary and years served | Monthly contributions plus interest |
| Paid | On exit, as a lump sum | On retirement, or on withdrawal |
Frequently asked questions about gratuity
How is gratuity calculated in India?
For employees covered by the Payment of Gratuity Act: (15 × last drawn basic plus DA × completed years of service) ÷ 26. Any part-year over six months counts as a full year.
Is 5 years mandatory for gratuity?
Generally yes — five years of continuous service. The condition is waived if employment ends because of death or disablement, in which case it is paid regardless of tenure.
Is gratuity taxable?
For private-sector employees covered by the Act, it is exempt up to the least of ₹20 lakh, the actual amount received, or the formula amount. The ₹20 lakh is a lifetime limit across all employers. Government employees receive it fully exempt.
Is gratuity part of CTC?
Usually yes — employers include a gratuity provision in CTC, which is one reason CTC is higher than your in-hand pay. You only actually receive it if you complete the qualifying service.
Related terms
Try it with your own numbers
Related guides
How BudgetAnalyzer uses this
A gratuity payout is a rare lump sum, and it disappears fastest when it is not tracked. Record it in BudgetAnalyzer as income and route it to a goal, so it becomes part of your retirement corpus rather than a month of untracked spending.
Ready to take control of your money?
Bring every expense, budget and account into one private dashboard — free to start.