What Is Gratuity?
Gratuity is a statutory retirement benefit paid by an employer to an employee as a token of appreciation for long service. It is governed by the Payment of Gratuity Act, 1972 — one of India's most important labour laws.
Unlike PF (Provident Fund), which is contributed by both employer and employee every month, gratuity is entirely funded by the employer. Employees do not contribute towards gratuity. It becomes payable when an employee leaves the company after completing a minimum of 5 years of continuous service — whether through resignation, retirement, death, or disablement.
Who Is Covered Under the Payment of Gratuity Act, 1972?
The Act applies to every factory, mine, oilfield, plantation, port, railway company, shop, or establishment where 10 or more employees are employed. Once an establishment is covered, it continues to be covered even if the number of employees later falls below 10.
Gratuity Formula: Covered vs Not Covered
Formula for Employees Covered Under the Act
Important rules about the years of service calculation:
- If the remaining months are 6 months or more, they round up to a full year
- If the remaining months are less than 6 months, they are ignored
- Example: 7 years 7 months → counted as 8 years; 7 years 4 months → counted as 7 years
Rajesh has worked for 8 years and 8 months. Last drawn Basic + DA = ₹55,000/month.
Since ₹2,85,577 is below ₹20L, the entire amount is tax-free.
Formula for Employees Not Covered Under the Act
This formula applies when an employer voluntarily pays gratuity to employees not covered under the Act. The "not covered" scenario is now increasingly rare since the Act's threshold of 10 employees is low.
Gratuity Quick Reference: CTC vs Years of Service
Use this table to find your approximate gratuity amount without a calculator. Figures are based on the Payment of Gratuity Act formula (Basic + DA = ~40% of CTC).
| Annual CTC | 5 Years | 7 Years | 10 Years | 15 Years | 20 Years | 25 Years |
|---|---|---|---|---|---|---|
| ₹5 LPA | ₹48,077 | ₹67,308 | ₹96,154 | ₹1,44,231 | ₹1,92,308 | ₹2,40,385 |
| ₹8 LPA | ₹76,923 | ₹1,07,692 | ₹1,53,846 | ₹2,30,769 | ₹3,07,692 | ₹3,84,615 |
| ₹10 LPA | ₹96,154 | ₹1,34,615 | ₹1,92,308 | ₹2,88,462 | ₹3,84,615 | ₹4,80,769 |
| ₹15 LPA | ₹1,44,231 | ₹2,01,923 | ₹2,88,462 | ₹4,32,692 | ₹5,76,923 | ₹7,21,154 |
| ₹20 LPA | ₹1,92,308 | ₹2,69,231 | ₹3,84,615 | ₹5,76,923 | ₹7,69,231 | ₹9,61,538 |
| ₹25 LPA | ₹2,40,385 | ₹3,36,538 | ₹4,80,769 | ₹7,21,154 | ₹9,61,538 | ₹12,01,923 |
| ₹30 LPA | ₹2,88,462 | ₹4,03,846 | ₹5,76,923 | ₹8,65,385 | ₹11,53,846 | ₹14,42,308 |
| ₹40 LPA | ₹3,84,615 | ₹5,38,462 | ₹7,69,231 | ₹11,53,846 | ₹15,38,462 | ₹19,23,077 |
| ₹50 LPA | ₹4,80,769 | ₹6,73,077 | ₹9,61,538 | ₹14,42,308 | ₹19,23,077 | ₹20,00,000* |
* Capped at ₹20L tax-exempt limit. Actual computed gratuity above ₹20L is taxable. Assumes basic = 40% of CTC. Months rounded to nearest year as per Act.
What is Gratuity on ₹30,000 Basic Salary?
For an employee with a last drawn basic salary (+ DA) of ₹30,000/month, gratuity under the Payment of Gratuity Act is calculated as:
Formula: ₹30,000 × (15/26) × Years of Service
All amounts are below the ₹20L limit → fully tax-free under Section 10(10).
What is Gratuity for 10 Years of Service?
Gratuity for 10 years of service depends on your last drawn basic salary (+ DA). The formula gives you:
- ₹20,000 basic → Gratuity = ₹1,15,385 (10 yrs)
- ₹30,000 basic → Gratuity = ₹1,73,077 (10 yrs)
- ₹50,000 basic → Gratuity = ₹2,88,462 (10 yrs)
- ₹1,00,000 basic → Gratuity = ₹5,76,923 (10 yrs)
The quick reference table above gives estimates by CTC — use the calculator above for exact figures based on your actual basic salary.
How Much Gratuity for 5 Years of Service?
5 years is the minimum service required for gratuity. At the 5-year mark, the gratuity is: Basic Salary × (15/26) × 5 = approximately 2.88 months' basic salary. For someone earning ₹50,000/month basic, the gratuity after 5 years would be ₹1,44,231 — entirely tax-free.
Who Is Eligible for Gratuity?
An employee becomes eligible to receive gratuity when they have completed 5 years of continuous service with the same employer, and their employment ends due to any of the following:
- Retirement or Superannuation — normal retirement on reaching age limit
- Resignation — after completing 5+ years of service
- Death or Disablement — no minimum service period required (paid to nominee/legal heirs)
- Retrenchment — layoff or redundancy after 5 years
- Termination — except in cases of forfeiture (see below)
Does Maternity Leave Count for Gratuity?
Yes. Authorised leaves — including maternity leave, sick leave, earned leave, and casual leave — count as continuous service for gratuity purposes. Unauthorised absence, however, can break continuity of service.
What Is "Continuous Service" for Gratuity?
An employee is considered to have rendered continuous service if they have been in service for:
- 190+ days in a year (for employees in mines or establishments working below ground)
- 240+ days in a year (for all other employees)
Is Gratuity Taxable in India?
Gratuity tax treatment depends on the amount and whether the employee is covered under the Payment of Gratuity Act:
| Employee Type | Tax-Exempt Amount | Basis |
|---|---|---|
| Covered under Payment of Gratuity Act | Least of: (a) Actual gratuity received, (b) ₹20,00,000, (c) 15/26 × last salary × years | Section 10(10) of Income Tax Act |
| Not covered under Act (private sector) | Least of: (a) Actual gratuity, (b) ₹20,00,000, (c) Half month's salary × years | Section 10(10) of Income Tax Act |
| Government employees / PSU | Fully exempt — no limit | Section 10(10)(i) |
How to Report Gratuity in ITR
If your total gratuity is below ₹20L, it is fully tax-exempt and does not need to be included as income. If it exceeds ₹20L, only the excess is taxable — report it under "Income from Salary" in your ITR. Your employer will show the exempted amount under Form 12BB / Form 16.
How to Claim Gratuity
- Submit Form I: The employee must submit an application in Form I to the employer (or their nominee in case of death) within 30 days from the date gratuity becomes due.
- Employer Acknowledgment: The employer must acknowledge receipt of Form I within 15 days and calculate the gratuity amount within 15 days of the date it becomes payable.
- Payment Timeline: The employer must pay within 30 days of the gratuity becoming due. If delayed, the employer pays simple interest at 10% per annum from the due date.
- Dispute Resolution: If there's a dispute, either party can apply to the Controlling Authority (a government-appointed officer) under the Act. The Controlling Authority's decision can be appealed to an appellate authority.
When Can Gratuity Be Forfeited?
The Payment of Gratuity Act allows forfeiture of gratuity only in specific circumstances:
- Termination for wilful omission or negligence causing damage or loss to the employer — gratuity may be forfeited to the extent of the damage
- Termination for riotous conduct, disorderly behavior, or moral turpitude — gratuity can be wholly or partially forfeited
- Conviction of an offence involving moral turpitude
Importantly, gratuity cannot be forfeited for normal resignation or for misconduct that doesn't involve the specific grounds above. Many employees mistakenly believe their gratuity can be withheld for leaving without notice — this is not correct under the Act.
Gratuity vs PF vs Leave Encashment: Key Differences
| Feature | Gratuity | PF | Leave Encashment |
|---|---|---|---|
| Funded by | Employer only | Both (12% each) | Employer |
| Minimum service | 5 years | No minimum | No minimum |
| On resignation | Yes (5+ yrs) | Yes (after 2 months) | Yes (varies) |
| Tax exempt limit | ₹20 lakh | Interest exempt up to limit | ₹3 lakh (private) |
| Governed by | Payment of Gratuity Act | EPF Act, 1952 | Income Tax Act |
Frequently Asked Questions
How is gratuity calculated in India?
For employees covered under the Payment of Gratuity Act: Gratuity = (Last Basic + DA) × 15/26 × Completed Years of Service. If remaining months are 6 or more, they round up to a full year. The tax-free limit is ₹20 lakh.
What is the minimum years of service for gratuity in India?
The minimum is 5 years of continuous service. Exception: if an employee dies or becomes permanently disabled, gratuity is payable regardless of years worked.
Is gratuity taxable in India?
Gratuity up to ₹20 lakh is fully tax-exempt for private sector employees covered under the Payment of Gratuity Act. Amounts above ₹20L are taxable at the applicable income tax slab rate. Government employees enjoy full exemption with no upper limit.
Can I get gratuity if I resign before 5 years?
No, the 5-year continuous service requirement cannot be waived unless death or permanent disablement occurs. However, some employers voluntarily pay gratuity for shorter tenures as an internal policy — this is not legally required.
What happens to gratuity if the company shuts down?
The Gratuity Act's obligations survive company closure. Employees are treated as preferential creditors for gratuity claims. If the company was insured for gratuity (required by law), the insurance company pays out. If not insured, the liquidator must settle gratuity claims before other creditors.
Is gratuity applicable to contract employees?
Contract employees working directly for an employer (not via a contractor) are eligible for gratuity if they meet the 5-year rule. If they work via a manpower contractor, the contractor is the employer for gratuity purposes. For fixed-term contracts, the amendment of 2018 allows gratuity on a pro-rata basis after completing one year.
What is gratuity on ₹10 LPA salary?
For a ₹10 LPA CTC employee (basic ≈ ₹4L/yr = ₹33,333/month), the gratuity formula gives: ₹33,333 × (15/26) × years. After 5 years: approximately ₹96,154. After 10 years: approximately ₹1,92,308. After 15 years: approximately ₹2,88,462. All amounts are below the ₹20L limit and fully tax-free.
What is gratuity on ₹20 LPA salary?
For a ₹20 LPA CTC employee (basic ≈ ₹8L/yr = ₹66,667/month): After 5 years ≈ ₹1,92,308. After 10 years ≈ ₹3,84,615. After 15 years ≈ ₹5,76,923. After 20 years ≈ ₹7,69,231. All tax-free (below ₹20L ceiling).
Is gratuity included in CTC?
Yes, most Indian employers include gratuity provision (4.81% of basic salary) as part of the CTC. This provision accrues monthly but is paid as a lump sum on separation after 5+ years. It does not appear in your monthly salary slip — it only becomes payable when you exit. Some employers show it separately as "Retirement Benefits" in the CTC breakup.
How is gratuity different from PF (Provident Fund)?
Gratuity is funded entirely by the employer and requires minimum 5 years of service. PF (Provident Fund) is contributed by both employer and employee (12% of basic salary each), accumulates monthly, and can be withdrawn earlier. Gratuity is calculated on last drawn basic salary; PF on contributions over the full tenure. Both are tax-exempt up to their respective limits.
