What is Gratuity? Complete Guide for Indian Employees
Gratuity is a lump-sum payment made by an employer to an employee as a token of gratitude for services rendered. It is governed by the Payment of Gratuity Act, 1972 and is one of the most important financial benefits for long-serving employees in India.
Who is Eligible for Gratuity?
Under the Payment of Gratuity Act 1972, you are eligible if:
- You have completed at least 5 years of continuous service with the same employer
- Your employer has 10 or more employees at any point during the year
- You are leaving employment due to resignation, retirement, superannuation, death, or disablement
Important exception: In case of death or disablement, the 5-year minimum is waived. The nominee or legal heir receives the gratuity.
Gratuity Formula — How is it Calculated?
For employees covered under the Payment of Gratuity Act:
Gratuity = (Basic Salary + DA) × 15/26 × Years of Service
The factor 15/26 represents 15 days' wages for every completed year of service (based on a 26-working-day month). Only completed years count — if you have 6 years and 7 months, only 6 years are counted. However, if the fraction exceeds 6 months, many courts and companies round up.
For employees not covered by the Act (discretionary gratuity):
Gratuity = Basic Salary ÷ 2 × Years of Service
Gratuity Tax Exemption — Section 10(10)
Gratuity received is exempt from income tax up to certain limits under Section 10(10) of the Income Tax Act:
- Government employees: Entire gratuity is tax-free
- Non-government employees (covered by Act): Least of — actual gratuity, ₹20 lakh, or 15/26 × last drawn Basic × years
- Non-government employees (not covered): Least of — actual gratuity, ₹20 lakh, or half month's average salary × years
The ₹20 lakh tax-free limit was enhanced from ₹10 lakh in 2019 and applies across a lifetime (cumulative). Any amount above ₹20L is taxable as salary income in the year of receipt.
Frequently Asked Questions
Can I get gratuity if I resign before 5 years?
No. The Payment of Gratuity Act requires a minimum of 5 continuous years of service. However, in case of death or total disablement, this condition is waived and the nominee receives gratuity even for shorter service periods.
What counts as "Basic Salary" for gratuity calculation?
Under the Payment of Gratuity Act, the formula uses Basic Salary + Dearness Allowance (DA). HRA, conveyance, special allowance, and other components are excluded. Many IT companies have zero DA, so only basic salary is used.
When must the employer pay gratuity?
The employer must pay gratuity within 30 days of it becoming due. If payment is delayed, the employer must pay simple interest at the rate notified by the government (usually 10% p.a.) for the period of delay beyond 30 days.
Does the New Labour Code change gratuity rules?
The Code on Social Security 2020 (one of the 4 Labour Codes) proposes to extend gratuity eligibility to fixed-term contract employees on a pro-rata basis — even before 5 years. Once notified by states, this could significantly expand who gets gratuity. As of 2026, the old Act still applies in most states.
Is gratuity paid on gross salary or basic salary?
Gratuity under the Act is calculated on Basic + DA only, not on gross salary. This is different from EPF (also on Basic+DA) and different from HRA or special allowances.