Gratuity Explained: Eligibility, Formula and Tax Rules

Formula

For covered establishments, gratuity is calculated using the last drawn basic salary plus dearness allowance, multiplied by 15 days of wages for every completed year of service. The divisor 26 represents working days in a month for the statutory formula.

Years of service are rounded according to the rules. A part of a year above six months is generally rounded up to the next full year, while a part below six months is ignored. This rounding can make a noticeable difference near exit dates.

Tax treatment

Gratuity up to ₹20 lakh is fully tax-free for eligible private-sector employees, subject to the rules applicable at the time of receipt. Government employees generally enjoy full exemption regardless of amount. Any taxable portion is added to income and taxed according to the slab.

The exemption applies to gratuity received, not merely accrued. If you change jobs multiple times and receive gratuity more than once, the lifetime exemption limit must be considered across receipts. Keep records of earlier gratuity payments and exemptions claimed.

• Government employees: generally fully exempt.
• Covered private employees: exemption based on formula, actual gratuity or notified limit, whichever is lower.
• Non-covered employees: separate exemption calculation applies.
• Tax rules can change, so verify the current limit when you exit.

Eligibility

Continuous service does not mean you never took leave. Approved leave, sickness, accident leave, layoff, strike or lockout periods may still count depending on the circumstances. What matters is whether employment continued under the law and company records.

For employees close to five years, exit timing matters. Leaving a few weeks early may create disputes or reduce eligibility. If you are planning a voluntary resignation and gratuity is material, check service completion dates carefully.

• Minimum 5 years of continuous service in normal resignation or retirement cases.
• Five-year condition is waived in death or disability cases.
• Payable on resignation, retirement, superannuation, death, disablement or termination.
• Applies to factories, mines, oilfields, plantations, ports, railway companies, shops and establishments meeting the statutory employee threshold.

Why gratuity matters in CTC

Many salary structures include employer gratuity cost inside CTC. That does not mean the amount is paid monthly. It is an accrued statutory benefit paid only when eligibility conditions are met. This is one reason CTC can look higher than actual in-hand salary.

If you leave before becoming eligible, the gratuity component shown in CTC may not become payable. When comparing job offers, separate cash salary, retirement benefits, insurance, bonuses and long-term benefits instead of looking only at the headline CTC number.

Documents and settlement process

At exit, HR normally calculates gratuity as part of the full and final settlement. You may need to submit bank details, identity documents and forms required by the employer. In death cases, nominees or legal heirs may need additional documents.

Check the calculation carefully: last drawn basic plus DA, rounded service years, statutory formula, tax exemption and TDS if any. Errors are not rare, especially when salary structures changed during employment or records have incomplete service dates.