What Is Gratuity and Who Is Eligible?
Gratuity is a lump-sum retirement benefit paid by an employer to an employee as a reward for continuous service, governed by the Payment of Gratuity Act, 1972. Unlike PF or your monthly salary, it is not something you accumulate access to gradually — it's an all-or-nothing benefit tied to a minimum service period.
You're eligible for gratuity if:
- You've completed 5 years of continuous service with the same employer
- Your organisation employs 10 or more people (covered under the Act)
- You're leaving due to resignation, retirement, or termination (not for misconduct)
The Exact Gratuity Formula — With Examples
For employees covered under the Act, the formula is:
The "15 ÷ 26" comes from treating each year of service as entitling you to 15 days' wages, calculated on a 26-working-day month (the same working-day convention used for notice period buyout calculations). Here's what that looks like in practice:
| Last drawn basic salary | Years of service | Gratuity payable |
|---|---|---|
| ₹25,000 | 5 years | ₹72,115 |
| ₹40,000 | 8 years | ₹1,84,615 |
| ₹60,000 | 10 years | ₹3,46,154 |
| ₹1,00,000 | 15 years | ₹8,65,385 |
Why Gratuity Is in Your CTC but Not Your Monthly Salary
Many employers include an annual gratuity provision inside your CTC — typically expressed as 4.81% of your basic salary. This figure is the same 15/26 formula, just re-expressed as a yearly accrual rate: 15 ÷ 26 ÷ 12 months ≈ 4.81% of annual basic salary set aside per year of service.
This is a provisioning figure, not cash you receive. Your employer is essentially setting aside money that only becomes yours as a lump sum if you complete 5 years and then leave. That's why your monthly in-hand salary is always lower than a simple CTC ÷ 12 calculation — the gratuity portion (along with employer PF) never reaches your bank account monthly.
Use the CTC to In-Hand Calculator to see exactly how much of your CTC is absorbed by gratuity provisioning versus what actually lands in your account each month.
Gratuity Tax Exemption — The ₹20 Lakh Rule
Under Section 10(10) of the Income Tax Act, gratuity received is tax-exempt up to the lowest of these three amounts:
- ₹20 lakh (the statutory lifetime limit, revised upward in 2018 from ₹10 lakh)
- The amount calculated using the formula above
- The actual gratuity amount received from your employer
Any amount above this exempt limit is added to your taxable salary income for that year and taxed at your applicable slab rate.
When Gratuity Is NOT Paid
You forfeit your entire gratuity entitlement if:
- You resign or are terminated before completing 5 years of continuous service (except death/disablement)
- You're terminated for proven misconduct involving moral turpitude or causing loss to the employer — gratuity can be wholly or partially forfeited in such cases
4 Things to Check About Your Gratuity
- Is your organisation covered under the Payment of Gratuity Act? Companies with fewer than 10 employees may not be legally required to provide it, though many still do voluntarily under a separate policy.
- Does your offer letter show gratuity inside the CTC? If so, remember this reduces your effective monthly take-home even though it's listed as part of your "package."
- Are you close to the 5-year mark before resigning? Leaving even a few months early can mean forfeiting the entire amount — worth timing your exit carefully if a gratuity payout is significant.
- Have you tracked gratuity from previous employers? Since the ₹20 lakh tax exemption is a lifetime limit, keep records of any gratuity already received and taxed.