✍Reviewed by CA Ramesh Iyer, CFP
Gratuity is a lump-sum retirement benefit paid by an employer to an employee upon leaving — whether due to retirement, resignation, death, or disablement. It is governed by the Payment of Gratuity Act, 1972 and applies to every establishment with 10 or more employees.
Key facts: Minimum 5 years of continuous service required. Maximum tax-free gratuity is ₹20 lakh (revised in 2018). The formula uses 15 days of last drawn basic salary per completed year of service.
Enter Details
Gratuity = (Basic Salary ÷ 26) × 15 × Years of Service
Divisor 26 for companies covered under Gratuity Act (10+ employees). Divisor 30 for non-covered companies.
Tax-free limit: ₹20,00,000 (revised 2018).
Inputs
Results
Step-by-Step
Gratuity = (50,000 / 26) × 15 × 10 = ₹2,88,462. Fully tax-free since it is under the ₹20 lakh limit.
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| Factor | Covered (10+ employees) | Not Covered (<10 employees) |
|---|---|---|
| Formula | (Basic / 26) × 15 × Years | (Basic / 30) × 15 × Years |
| Minimum Service | 5 years (mandatory by law) | As per company policy |
| Payment Timeline | Within 30 days | No statutory deadline |
| Tax-Free Limit | ₹20,00,000 | Half month salary per year (ITO rules) |
| Legal Recourse | Yes — Controlling Authority | Civil suit only |
5
year rule: For employees working 6 days/week, 4 years 240 days qualifies as 5 years. For 5-day week: 4 years 190 days may qualify — check Supreme Court rulings.
Death/Disability
Gratuity is paid regardless of years of service if an employee dies or becomes permanently disabled.
Forfeiture
An employer can forfeit gratuity (partly or fully) if an employee is terminated for misconduct causing damage.
Tax treatment
Central/state government employees: fully exempt. Others: exempt up to ₹20L. Amount above ₹20L is added to income and taxed at your slab rate.
DA included? If your DA is merged with b
DA included? If your DA is merged with basic, it is included in the calculation. Standalone DA as an allowance is excluded.
For employees covered under the Payment of Gratuity Act (companies with 10+ employees):
Gratuity = (Last Drawn Basic Salary ÷ 26) × 15 × Years of Service
For non-covered companies: replace 26 with 30. The "15" represents 15 working days per year of service.
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