Gratuity

Gratuity is a statutory lump‑sum benefit paid by employers to employees as appreciation for long service. Governed by the Payment of Gratuity Act, it applies to organizations with 10 or more employees, typically after five years of continuous service.

Eligibility & Key Rules

• Applicable to employees who complete five or more years of continuous service.
• Exceptions allow gratuity payment in cases of death or disability, regardless of tenure.
• The Act covers factories, mines, plantations, railways, ports, and businesses with at least 10 employees in the preceding 12 months.

Gratuity Calculation Formula

• For employers covered under the Act:
  Gratuity = (Last drawn basic salary + Dearness Allowance) × 15 × Years of service ÷ 26
• For employers not covered:
  Similar formula but divide by 30 instead of 26.

The fraction 15/26 represents fifteen days’ wages per completed year, based on an assumed 26 working days. Service tenures over six months in the final year are rounded up to the next year.

Maximum Limits & New Updates

• Maximum tax‑exempt gratuity limit in the private sector is capped at ₹10 lakh (some updates mention ₹20 lakh for government sectors or due to recent labour reforms).
• Recent labour code reforms in India have updated definitions of wages and worker eligibility, which may impact gratuity calculation and applicability to gig or informal workers.

Tax Treatment

• Government employees often receive fully tax‑exempt gratuity.
• For private‑sector employees under the Act, the least of the following is tax-exempt:
  1. Actual gratuity received
  2. Statutory calculation amount
  3. ₹20 lakh (or revised limit).