What is Gratuity and How is it Calculated? Formula & Slabs

Gratuity is a statutory monetary benefit paid by an employer to an employee as a token of appreciation for their continuous service. It is governed by the Payment of Gratuity Act, 1972 and represents a key component of retirement planning in corporate India.

Eligibility and Service Rules

To receive gratuity, an employee must satisfy these primary conditions:

• Must be eligible for gratuity (working in an establishment with 10 or more employees).
• Must have completed at least 5 years of continuous service with the same employer. (An exception is made in case of death or disablement of the employee).

The Gratuity Calculation Formula

For organizations covered under the Gratuity Act, the calculation is standard:

Where:

• Last Drawn Salary: Basic Salary + Dearness Allowance (DA).
• Service Tenure: Number of completed years. Any service above 6 months is rounded up to a full year (e.g., 7 years and 7 months is counted as 8 years).
• 26: Represents the number of working days in a month.

Tax Exemption and Slabs

Gratuity received by government employees is completely tax-exempt. For private-sector employees, gratuity payouts are exempt from tax up to a maximum statutory cap of ₹20,000,000 (₹20 Lakhs).