The Gratuity Act is a law that helps you get a thank-you bonus when you leave a job after working for at least 5 years. This money is paid by your employer and is meant to appreciate your dedication.
Who Is Eligible?
You qualify for gratuity if:
- You’ve worked 5 or more years continuously.
- You are a full-time salaried or wage employee.
- You leave your job due to retirement, resignation, or death/disability.
Note: Even if you switch jobs, leaving each one after 5+ years counts separately.
How Is Gratuity Calculated?
There are two ways employers usually calculate it:
For Government/PSU Employees
Formula:
Last Drawn Salary × Service Years × 1/4 - Salary = Basic Pay + Dearness Allowance
- Years = Rounded down to nearest half-year
For Private Employees
Formula:
Last Drawn Salary × Service Years × 15/26 - 15 days wage: Equals 15/26 of a monthly salary
- Example: If salary = ₹30,000/month and you worked 10 years,
Gratuity = 30,000 × 10 × 15/26 = ₹1,73,076
Tax Implications on Gratuity
- Exempt for government workers – entire amount is tax-free.
- Private sector exemption limit: Up to ₹20 lakh is tax-free.
- Beyond ₹20 lakh: The extra amount is taxable as income.
Simple Example
Meet Raj, a private sector employee:
- Worked: 8 years
- Salary (Basic + DA): ₹40,000/month
Gratuity = 40,000 × 8 × 15/26 = ₹1,84,615
Tax-free limit = ₹1,84,615 (below ₹20 lakh)
No tax payable on this gratuity.
Why This Matters
- Helps you plan finances when leaving a job.
- Ensures you understand if gratuity is fully tax-free or partly taxable.
- Aids in making smart tax decisions and filing returns correctly.
