What is Gratuity?


A gratuity is a benefit (fund) offered by employers to the employees under the Payment of Gratuity Act of 1972, during the time of leaving the organization after serving a longer period of time. The money paid by the employer is a way of showing "gratitude" for rendering their services to the organization.


Few instances when an employee will be eligible to receive Gratuity Amount.

1. When an employee is eligible for superannuation

2. In the case of retirement

3. When an employee resigns after working for 5 years with the same firm

4. When an employee passes away or suffers disability due to illness or accident.

Calculation Formulae:

1. For Monthly fixed Salaried employees:

Gratuity = Last drawn Salary(Basic+DA)*15/26*No. of years served

2. Seasonal Employees:

Gratuity = Last drawn Salary(Basic+DA)*7/26*No. of seasons served

3. Piece Rate Employees:

Gratuity = Average salary(Basic+DA) of last three months*15/26*No. of Years served


In case of Monthly fixed Salaried employees

Nitin has worked with a company for 21 years and had Rs.30,000 as his last drawn basic plus DA amount, then,

Gratuity Amount for Nitin = 30,000*15/26*21 = Rs.3,63,462

Tax Exemptions on Gratuity:

1. According to Article 10 (10) in the Income Tax Act, any gratuity received by government employees, apart from statutory corporations, is fully exempt from tax.

2. In the case of private employees’ a maximum of up to Rs.20 Lakh amount of gratuity will be tax exempted.

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