Gratuity is a lump-sum benefit paid by an employer to an employee as a token of appreciation for continuous service, governed by the Payment of Gratuity Act, 1972. It becomes payable on retirement, resignation, death, or disablement, provided the employee has completed at least five years of continuous service (this condition is waived in case of death or disablement).
For employees covered under the Act, gratuity is calculated using the formula: (15 × Last Drawn Salary × Years of Service) ÷ 26, where "salary" means Basic plus Dearness Allowance, and 26 represents the number of working days in a month under the Act. Years of service are rounded — a period of 6 months or more is counted as a full year.
Gratuity received is exempt from tax up to ₹20 lakh under Section 10(10) of the Income Tax Act (for private-sector employees covered by the Act) — anything above this limit, or gratuity received by employees not covered by the Act using a different formula, may be partially taxable. This calculator estimates your gratuity and flags the exemption limit.
Generally no, except in cases of death or disablement of the employee, where the five-year condition does not apply.
Gratuity received by employees covered under the Payment of Gratuity Act is tax-exempt up to ₹20 lakh under Section 10(10). Amounts above this limit are taxable as salary income.
The Act applies to establishments with 10 or more employees. Many employers with fewer employees also choose to pay gratuity voluntarily, though the statutory formula may differ.
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