Gratuity

Gratuity is governed by the Payment of Gratuity Act, 1972, and applies to establishments employing 10 or more employees. The formula for calculation is: (Last Drawn Basic Salary + Dearness Allowance) × 15 × Completed Years of Service ÷ 26. The factor 15 represents 15 days of pay, and 26 represents the number of working days in a month. The maximum gratuity payable under the Act is INR 25 lakh (INR 2,000,000), though employers may pay higher amounts voluntarily. Gratuity is payable upon resignation, retirement, death, or disablement due to accident or disease. If an employee dies or becomes disabled, the five-year service requirement is waived. Gratuity received up to INR 25 lakh is exempt from income tax under Section 10(10) of the Income Tax Act for non-government employees. Employers with 10 or more employees must obtain a gratuity insurance policy or make provisions accordingly.

How is gratuity calculated in India?

Gratuity = (Last Drawn Basic Salary + DA) × 15 × Years of Service ÷ 26. For example, an employee with a basic salary of INR 50,000 and 10 years of service would receive: 50,000 × 15 × 10 ÷ 26 = INR 2,88,461. The maximum gratuity payable under the Act is INR 25 lakh.

Is gratuity taxable in India?

Gratuity received up to INR 25 lakh is exempt from income tax under Section 10(10) of the Income Tax Act for private sector employees. Any amount above INR 25 lakh is fully taxable as income in the year of receipt.