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A complete reference for HR professionals on gratuity eligibility, calculation formulas, statutory limits and tax treatment under the Payment of Gratuity Act, 1972.
Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for services rendered. It is governed by the Payment of Gratuity Act, 1972, which applies to establishments employing 10 or more employees.
An employee becomes eligible for gratuity payment if:
Note: The 5‑year service condition is waived in case of death or disablement of the employee.
Continuous service does not require the employee to be on duty every single day. Absences due to leave, layoff, strike or accident are generally not considered as breaks in continuous service, provided the employee returns to duty after the event.
The formula to calculate gratuity depends on whether the establishment is covered under the Act and the type of work (monthly-rated or daily-wage).
Gratuity = (Last drawn salary × 15 × Number of completed years of service) ÷ 26
Where:
Service period: 12 years 8 months
Last drawn salary: ₹40,000 (Basic + DA)
Completed years: 13 years (12 years + 8 months rounded up)
Gratuity = (40,000 × 15 × 13) ÷ 26 = ₹3,00,000
Gratuity = (Average daily wages × 15 × Number of completed years of service)
Where average daily wages are calculated based on the wages drawn in the last 10 months immediately preceding termination.
Under the Payment of Gratuity Act, 1972, the maximum gratuity payable is capped at ₹20,00,000 (as amended in 2018, increased from the earlier limit of ₹10,00,000).
For employees covered under the Payment of Gratuity Act, gratuity received up to ₹20,00,000 is exempt from income tax under Section 10(10) of the Income Tax Act, 1961. Any amount exceeding this limit is taxable as salary income.
Gratuity can be fully or partially forfeited if the employee's services are terminated for:
HR Pearls automates gratuity calculations based on service records, last drawn salary and statutory rules. The system:
Service period: 25 years 3 months
Last drawn salary: ₹60,000 (Basic + DA)
Completed years: 25 years (3 months is less than 6, so not rounded up)
Calculated Gratuity = (60,000 × 15 × 25) ÷ 26 = ₹8,65,384
Payable Gratuity: ₹8,65,384 (within the ₹20 lakh ceiling, so full amount is paid)
Gratuity is an important component of employee compensation and a statutory obligation for
Still Need Help?
Dedicated enterprise success manager and 24×7 priority support available for larger rollouts.
Chat with our support team or email payrollmanager@webtel.in.