Gratuity in India: Eligibility, Minimum Service Requirement & Step-by-Step Calculation

Gratuity is the amount that your employer gives you in return of your years of service at the time of leaving the job or retirement. In a way, it is one of the benefits given at the time of retirement. On retirement from the job, along with the provident fund and pension fund, another amount comes in the hands of the employed person which is called gratuity.

In today’s era, the idea of ​​spending the entire career in the same company is now outdated. Usually people change jobs frequently, but gratuity is also received by those people who have spent at least 5 years in a single company.

Highlights

• Gratuity is a retirement benefit paid by employers to employees after long-term service.
• Minimum continuous service of 5 years is required to be eligible for gratuity.
• Gratuity calculation involves the last drawn basic salary plus dearness allowance, multiplied by 15, multiplied by years of service, divided by 26.
• Gratuity amounts up to ₹20 lakh are fully exempt from income tax.
•  Frequent job changes within less than 5 years lead to forfeiture of gratuity eligibility.
• Gratuity helps employees manage post-retirement expenses alongside provident fund and pension.
• Understanding gratuity calculation is essential for employees to ensure rightful financial benefits at job exit or retirement.

Now let us mention some such questions which come in the mind of almost every employed person at some time or the other, such as what is gratuity, how is gratuity calculated, when can I get gratuity, how much of the amount that I will get in the form of gratuity will be tax free, on how much gratuity will I have to pay income tax. Many people wait for the gratuity received on retirement or job change so that Some routine expenses can be met through the amount of gratuity

Now the biggest question is when can gratuity be received? Gratuity is given to every employee who has worked continuously for 4 years, 10 months and 11 days before leaving his job or retiring. The job of such a worker is considered to be 5 years of continuous service.

As per the rules, any employee is considered to be entitled to gratuity only after 5 years of service. So remember, if you have a habit of changing jobs frequently in a year or two, then you will never get the amount of gratuity. Salary is received every month and so is its payslip. That is why every employed person knows how much basic salary he got, how much dearness allowance and how much house rent allowance and how much income tax was deducted, but not everyone knows how to calculate how much gratuity will be received on changing the job or retiring.

Now know what is the formula to calculate gratuity. Gratuity = (Last Drawn Basic Salary + Dearness Allowance) x 15/26 x Number of Completed Years of Service). Gratuity is not given for working less than 5 years in any job. But if you work for more time in the company, you are entitled to gratuity. After completion of 5 years of service, for every year of service, the basic salary of the last month of service i.e. basic salary and dearness allowance are added and multiplied by 15.

How Gratuity is Calculated in India

Gratuity is a lump sum benefit given 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.

 Eligibility

• An employee becomes eligible for gratuity after completing at least 5 years of continuous service with the same employer.

• Exception: In case of death or disability, gratuity is payable even if the employee hasn’t completed 5 years.

Formula for Gratuity Calculation

For employees covered under the Act:

$$\text{Gratuity}=(\text{Last Drawn Salary}\times 15\times \text{Years of Service})÷26$$

Where:

• Last Drawn Salary = Basic Salary + Dearness Allowance

• 15 = 15 days of wages for each year of service

• 26 = Number of working days in a month (as per law)

Example:

If your last drawn salary = ₹40,000 (Basic + DA)
Years of service = 10

$$\text{Gratuity}=(40,000\times 15\times 10)÷26=₹2,30,769$$

Tax Benefits

• Gratuity received is tax-free up to ₹20 lakhs in a lifetime (as per Income Tax Act, 2023).

the amount less than this received as gratuity will be completely tax free, i.e. no tax of any kind will have to be paid on that entire amount.