What is Gratuity?

Gratuity is a one-time, statutory retiral benefit paid by an employer to an employee in recognition of past service, payable on resignation, retirement, superannuation, death or disablement. It is governed by the Payment of Gratuity Act, 1972, which applies to factories, mines, plantations, ports, railway companies, shops and establishments with 10 or more employees.

• An employee generally needs 5 years of continuous service with the same employer to qualify.
• The 5-year condition is waived if employment ends due to death or disablement caused by accident or disease.
• "Continuous service" has a specific statutory meaning that counts certain approved leave, lay-off and absence periods — not only days physically worked.

For employees covered under the Act, gratuity is calculated as: (15 × last drawn basic salary + dearness allowance × number of completed years of service) ÷ 26.

Worked example: an employee with a last-drawn basic + DA of ₹40,000/month and 8 completed years of service would receive (15 × 40,000 × 8) ÷ 26 ≈ ₹1,84,615.

A period of service of more than 6 months in the final year is rounded up to a full year for this calculation.

• Using gross salary instead of basic + DA in the formula.
• Treating all resignations under 5 years as ineligible without checking the continuous-service definition or death/disablement exceptions.
• Not maintaining a gratuity trust or adequate funding/insurance, creating a surprise liability at separation.
• Forgetting that gratuity paid up to the government-notified exemption limit is tax-exempt under Section 10(10) of the Income-tax Act — amounts above that are taxable.