Understanding Gratuity
Gratuity is a retirement benefit provided to employees who have completed at least 5 years of continuous service with an organization. It's a statutory benefit under the Payment of Gratuity Act, 1972, and is calculated based on the employee's last drawn salary and years of service.
Eligibility for Gratuity
- Minimum Service: Employee must have completed at least 5 years of continuous service
- Retirement: Upon superannuation (retirement at the age of 58-60 years)
- Resignation: After completing 5 years of service
- Death or Disability: Even if service is less than 5 years
- Termination: Due to retrenchment, layoff, or voluntary retirement
Gratuity Calculation Formula
Gratuity = (Basic Salary + Dearness Allowance) / 26 × Years of Service
Where 26 represents the number of working days in a month
Key Components
Basic Salary
The basic salary component of your monthly pay package, excluding allowances and benefits.
Dearness Allowance (DA)
Cost of living adjustment allowance paid to compensate for inflation.
Years of Service
Total number of years of continuous service with the organization.
Maximum Limit
Maximum gratuity amount is capped at ₹20 lakhs as per current law.
Important Points to Remember
- Tax Exemption: Gratuity up to ₹20 lakhs is tax-free under Section 10(10) of the Income Tax Act
- Maximum Limit: The maximum gratuity amount is ₹20 lakhs, regardless of salary or years of service
- Partial Years: Service period of 6 months or more is considered as one full year
- Last Salary: Gratuity is calculated based on the last drawn salary (Basic + DA)
- Employer Contribution: Gratuity is paid by the employer, not deducted from salary
Gratuity vs Other Benefits
| Benefit | Eligibility | Calculation | Tax Treatment |
|---|---|---|---|
| Gratuity | 5+ years | (Basic + DA) / 26 × Years | Tax-free up to ₹20L |
| Provident Fund | Immediate | 12% of Basic + DA | Tax-free if 5+ years |
| Leave Encashment | On retirement | Unused leaves × Daily salary | Tax-free up to ₹3L |
How to Use Our Gratuity Calculator
- Enter your basic salary (excluding allowances and benefits)
- Input your dearness allowance (DA) amount
- Specify your years of service with the organization
- Enter your last drawn salary for reference
- Click "Calculate Gratuity" to get instant results
- View detailed breakdown and visual representation of your gratuity
Gratuity Planning Tips
- Keep track of your service years and salary progression
- Understand the maximum limit and plan accordingly
- Consider the tax implications of gratuity payments
- Factor gratuity into your retirement planning
- Keep employment records for gratuity claims
- Consult with HR for company-specific gratuity policies