What is Gratuity?

Background

Gratuity is a lump-sum benefit employers pay employees as a reward for long, continuous service, governed by the Payment of Gratuity Act, 1972. It usually becomes payable after at least five years of service.

Explanation

For covered establishments, gratuity is calculated using a formula based on last drawn basic salary plus dearness allowance, years of service and a fixed factor (often 15 days’ wages for each completed year). The government sets an upper limit on tax-exempt gratuity; amounts above that are taxable. Gratuity often arrives around retirement or job change and can be directed into your retirement corpus.

Example

If your last drawn basic + DA is ₹60,000 and you’ve served 20 years, the standard formula gives gratuity around 15/26 × 60,000 × 20 ≈ ₹6.9 lakh (subject to caps). You might use it to pay off a loan or add to your retirement investments.

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