Gratuity in India: Eligibility, Calculation and Tax Treatment

Gratuity is a lump sum paid to employees when they leave after qualifying service. It was governed by the Payment of Gratuity Act, 1972, and is now part of the Code on Social Security, 2020. This guide explains the rules.

Who Is Entitled

• Employees who complete five years of continuous service, on resignation, retirement or termination.
• On death or disablement, the five-year condition doesn't apply.
• Fixed-term employees, after one year of service under the Code on Social Security.

Gratuity law generally applies to establishments with 10 or more employees.

How to Calculate It

For most employees, gratuity is 15 days' wages for each completed year of service, calculated as last drawn monthly wages × 15 ÷ 26 × years of service. Service of more than six months in the final year is generally rounded up.

What Counts as Wages

Traditionally, basic pay plus dearness allowance. Under the Labour Codes, the uniform wage definition applies, and excluded allowances above 50% of total remuneration are added back — which can increase gratuity for employees with low basic pay.

The Ceiling

Statutory gratuity is capped, currently at ₹20 lakh. Employers can pay more under their own schemes.

Timing

Gratuity should be paid within 30 days of becoming payable. Late payment attracts interest.

Tax Treatment

For private sector employees, gratuity is exempt up to the lower of the statutory formula amount, the actual amount received, and a monetary limit, currently ₹20 lakh. Amounts above are taxed as salary.

For Employers

• Provide for the gratuity liability in the accounts, usually based on an actuarial valuation.
• Consider funding through an approved gratuity trust and insurer scheme.
• Collect nominations from employees.

Getting Help

Think Filing calculates gratuity, sets up funding, and handles payments and tax treatment.