What is Gratuity?

Definition

Gratuity is a lump sum an employer pays an employee on exit, under the Payment of Gratuity Act 1972, generally after five years of continuous service, calculated at fifteen days wages for every completed year.

How it works

The five-year condition is relaxed where employment ends because of death or disablement. The calculation uses last drawn wages, so gratuity rises with the final salary rather than accruing at each year rate, and there is a statutory maximum on the amount payable.

What it means in India

The Act applies to establishments meeting its coverage conditions, including factories and shops or establishments employing ten or more persons. The standard formula is last drawn wages, taken as basic plus dearness allowance, multiplied by fifteen, multiplied by the number of completed years, divided by twenty-six, with the fraction of a year beyond six months generally counted as a full year for this purpose. The Act sets a ceiling on the amount payable and the tax exemption has its own separate limit.

What people get wrong

• Assuming the gratuity provision inside CTC is money the employee will receive. Somebody leaving at three years usually receives nothing.
• Using gross salary in the formula instead of basic plus dearness allowance, which overstates the liability considerably.
• Forgetting that gratuity is payable on retirement, resignation and termination alike once the qualifying service is met, not only on retirement.

Work out your own number

The arithmetic on this page is easier to check against a real salary than to follow in prose, so there is a free page that does it for you. No sign-up.

Terms this one depends on

More on statutory deductions and benefits

Where this shows up in practice

Almost everything on this page ends up as a line on a payslip or a figure in a register. Shiftelio keeps attendance, leave, salary structure and the statutory deductions in one place, so the number in the letter and the number in the payslip come from the same record.