Gratuity Definition

Gratuity is a lump sum payment given to employees by their employer as a gesture of gratitude for the services provided during their period of employment. It’s a statutory benefit in many countries and is paid when an employee resigns, is laid off, retires, or upon death.

How is Gratuity Calculated?

Gratuity calculation is typically based on the employee’s tenure of service and basic salary. The common formula is:

Gratuity = (Basic Salary + Dearness Allowance) x Number of Years of Service x 15/26.

Eligibility Criteria for Gratuity

An employee is eligible for gratuity under the following conditions:

• Resignation or retirement after a minimum of 5 years of continuous service.
• In case of death or disability due to accident or sickness.
• Eligibility for a pension.

Taxation Rules on Gratuity in India

The tax-exempt limit for gratuity in India is currently capped at Rs. 20 lakh across an employee’s entire career. The amount exceeding this limit is taxable