If you’ve been working for a few years, you’ve probably seen “Gratuity” listed somewhere in your salary breakup — but have you ever stopped to ask what it really means?
I’ve met many employees who assume gratuity is just a retirement bonus, but it’s actually much more. It’s a quiet thank-you from your employer — a reward for loyalty and long service. Yet, confusion around eligibility, calculation, and taxation often leaves employees uncertain about what they’re entitled to. Let’s clear that up once and for all.
What Exactly Is Gratuity and Who Gets It?
Think of gratuity as a “thank-you payment” you receive when you’ve worked with an organization for at least five continuous years. It’s governed by India’s Payment of Gratuity Act, 1972, which applies to every company, school, hospital, or NGO that employs 10 or more people.
Once a company becomes eligible under the Act, it stays that way even if the staff count later drops below 10.
You can receive gratuity when you:
- Retire or resign after 5 years of service
- Leave due to disability or illness
- Or, if the unfortunate happens, your family receives it in the event of death
How Is Gratuity Calculated?
Here’s the formula most HR departments use:
Gratuity = (Last drawn salary × 15 × Years of service) ÷ 26
Where:
- Last drawn salary = Basic Pay + Dearness Allowance
- 15 = 15 days of wages per completed year
- 26 = Average working days per month (excluding Sundays)
Example:
If your last drawn salary is ₹30,000 and you’ve completed 10 years of service,
Gratuity = (30,000 × 15 × 10) ÷ 26 = ₹1,73,076
It’s simple math, but it reflects years of dedication.
Is Gratuity Part of Your CTC?
Some companies include gratuity in your Cost to Company (CTC); others don’t. It depends on their policy. When it’s included, it’s essentially a promise — a future payment the company owes you when you complete your service.
Can You Receive Gratuity Before Five Years?
Usually no, but there are two exceptions:
- If you pass away or become permanently disabled before five years.
- If you’ve completed 240 days in the fifth year (as per a Madras High Court ruling).
So technically, working for 4 years and 8 months could qualify you.
How Is Gratuity Taxed?
For government employees, gratuity is completely tax-free.
For private employees, it’s tax-exempt up to ₹20 lakh under Section 10(10) of the Income Tax Act. Anything above that limit is taxable.
Can a Company Forfeit Your Gratuity?
Yes — but only in rare cases, such as:
- Proven misconduct, violence, or moral offense at work
- Dismissal after a disciplinary inquiry
Even then, the company must follow due process before forfeiting gratuity.
How Soon Must It Be Paid?
By law, employers must release gratuity within 30 days from when it becomes due. Any delay attracts interest until the full payment is made.
Why 26 and Not 30 Days?
Because gratuity is calculated on actual working days, not the calendar month. With four weekly offs, 26 represents the true number of paid workdays in a month.
Frequently Asked Questions
1. What does “15 days’ salary” mean in gratuity?
It means you’re entitled to 15 days of your basic + DA for every completed year of service.
2. Can I get gratuity if I leave after 4 years 8 months?
Yes, courts have recognized 240 days in the fifth year as a valid threshold.
3. Is gratuity taxable for private employees?
It’s tax-free up to ₹20 lakh; anything above is taxed as per your income slab.
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