Gratuity

What it is

Gratuity is a statutory lump-sum benefit paid by an employer to an employee in recognition of long, continuous service — typically paid out on retirement, resignation, death, or disablement. It is governed by the Payment of Gratuity Act, 1972.

Who it applies to

The Act applies to establishments employing 10 or more people. Once covered, an establishment generally remains covered even if headcount later falls below that. An employee ordinarily becomes eligible after completing 5 years of continuous service, except in cases of death or disablement, where the 5-year requirement is waived.

How it's calculated

For employees covered under the Act, the standard formula is:

Gratuity = (15 × Last drawn salary [Basic + DA] × Completed years of service) / 26

The "26" represents the assumed working days in a month; service of 6 months or more beyond a completed year is usually rounded up to the next full year. There is also a statutory ceiling on the total gratuity amount payable — this cap is set by the government and has been revised upward more than once. It was last raised to ₹20 lakh via a 2018 notification; employers should still confirm the current figure against the latest government notification, since this is exactly the kind of number that changes with little advance notice. Employers may, at their discretion, pay more than the statutory formula and cap through company policy, but they cannot pay an eligible employee less.

Try the calculator

Rather than doing this arithmetic by hand, use our Gratuity Calculator — it applies the formula above, flags when you're likely past the last-known statutory cap, and clearly separates what's fixed by law from what's subject to revision.