Gratuity

What is Gratuity?

Gratuity is a lump-sum monetary benefit paid by an employer to an employee as a token of appreciation for long-term service. It is governed by the Payment of Gratuity Act, 1972 and becomes payable when an employee leaves the organization after completing at least five years of continuous service, whether due to resignation, retirement, superannuation, or death/disability (in which case the five-year rule is relaxed).

Key Features:

• Eligibility: Minimum of five years of continuous service with the same employer (except in death or disablement cases).
• Calculation Formula:
• Gratuity = (Last Drawn Basic Salary + Dearness Allowance) × 15 ÷ 26 × Number of Completed Years of Service.
• Maximum Limit: As per current law, the tax-free limit on gratuity is ₹20 lakh for private-sector employees.
• Tax Treatment: Gratuity received under the Act is partially exempt from income tax up to prescribed limits.
• Applicability: Mandatory for organizations employing 10 or more persons.
• Employer Obligation: Payment must be made within 30 days of separation; delays may attract interest.

Example

Suppose Neha worked for 12 years in a company, drawing a last basic salary (including DA) of ₹40,000.
Her gratuity = (₹40,000 × 15 ÷ 26) × 12 = ₹2,76,923.
If Neha resigns after completing 12 years, she will receive this amount as her gratuity benefit.

Why Gratuity Matters?

Gratuity serves as financial security and recognition for employee loyalty, encouraging long-term retention and employee satisfaction.