What is Gratuity? And how to calculate It?

Created on 24 Apr 2021

Wraps up in 5 Min

Read by 5.3k people

Updated on 13 May 2021

The job market has witnessed a shift from being employer-oriented to employee-oriented. This means, previously, the employer had the upper hand in deciding all aspects of employment, including salary, work culture, perks, working hours etc. The employee had to give in.

But with the increased competition and greater talent, the power currently lies with an employee to either stay in the same job or shift to a better one when he intends to. According to a recent study, employee retention is the major concern of the HR department in an organisation. Why are we discussing this? It is to introduce one of the financial rewards an employee receives for loyally with an organisation for a prolonged period.

Understanding Gratuity

So, let’s talk about Gratuity. As a token of appreciation and gratitude for the loyal work done by an employee, he receives a monetary benefit known as Gratuity. It forms part of the retirement benefits of an employee, meaning it is paid by the employer when the employee ceases to work in the organisation due to any reason. It is a lump-sum payment. Also, unlike provident funds, there is no contribution by the employee. 

In India, the Payment of Gratuity Act, 1972 sets out various provisions for matters relating to Gratuity. It clearly states the eligibility criteria of an employee to receive Gratuity, the procedure of calculation of the gratuity amount, forfeiture of this amount, and other rules.

Rules for Gratuity

Organisation with 10 or more employees

This number is calculated on a yearly basis. So, even if, on 1 day out of the last 12 months, 10 or more employees work in the organisation, the rules of Gratuity would apply to the organisation.

Completion of 5 years of service

The rules of the Payment of Gratuity Act would apply to an employee when he completes 5 continuous years of service. Also, the employee must be eligible for superannuation.

For this calculation, a total of 240 working days are considered in a year. For those working in mines and such other fields, the number of working days per year are considered as 190. 

The 5 years of continuous service also include interruptions caused by strike, absence from duty without leave, leaves, lockout, accident, layoff and termination of service not on the part of an employee. Gratuity is paid for every completed year of service or part thereof in excess of six months. In simple words, it means that any period worked in excess of 6 months is considered as a full year.

Circumstances under which Gratuity can be paid

The scope of availing gratuity is quite wide. The various circumstances under which an employee is eligible to receive Gratuity are the death of the employee, normal retirement, Voluntary retirement scheme, the employee being disabled due to an accident or disease, resignation, termination & layoff due to retrenchment. 


The Act prescribes that once the employee completes a year of service, he must fill in a form mentioning his nominee. The first preference should be given to his family members. During the course of his employment, an employee is free to change the nominee.

In case of death, Gratuity is paid to the nominee of the employee in the absence of whom, it is paid to the legal heir. If the legal heir is a minor, the amount is deposited in a FDR account till he becomes a major.

Calculation of the amount of Gratuity payable

It mostly depends on the applicability of the Payment of Gratuity Act, 1972. The Act is not applicable to all the employees. 

1. Employees not covered under the Act:

Gratuity Amount = (15 * average Salary* Employment Period) / 30.

Salary includes basic pay, dearness allowance and any commission based on sales.

The average of the last 10 months’ salary is considered for this computation.

Here, the number of working days in a month is considered as 30.

2. Employees covered under the Act

Gratuity amount= (15 * last drawn salary * tenure of working)/26

The last drawn salary includes basic pay, dearness allowance and any commission based on sales.

Here, the number of working days in a month is considered as 26.

Forfeiture of Gratuity

An employer is entitled to forfeit the amount of Gratuity payable to the employee if the employee is terminated from the job for any act, wilful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer, but only to the extent of the damage.

The employer can fully or partially forfeit the Gratuity payable;

  1. If the termination is due to the unruly behaviour of the employee.
  2. If the employee was terminated for any act which constitutes an offence involving moral turpitude, as long as the offence was committed in the course of his employment.

Taxability of Gratuity

Taxability of any income is a concerning issue. Is the Gratuity received taxable? It depends on the category that the employee falls into.

1. For employees covered under the Act, Gratuity is exempt up to the least of:

  • Rs.20,00,000
  • Actual Gratuity received
  • (15 * last drawn salary * tenure of working)/26

2. For employees not covered under the Act, Gratuity is exempt up to the least of:

  • Rs.10,00,000
  • Actual Gratuity received
  • (15 * average Salary * Employment Period)/ 30

3. For central/state government, defence, and local government authorities, any amount of Gratuity received is exempt.

Also, to be understood that the exemption amount of Rs.10,00,000 and Rs. 20,00,000 is cumulative in nature. It means, if an employee receives Gratuity from more than one employer, the total amount must be within the specified limits. Any amount exceeding the said limit would be taxable.

Any amount paid as Gratuity to the nominee, widow or legal heir of the employee is tax-free.

Calculate your gratuity here: Gratuity Calculator


Gratuity, as a concept, is advantageous to both the employee and employer. For the employee, it is a lucrative financial reward. And for the employer, it is a good way to retain the organisation’s human resource along with their skills and talent. But is the mere payment of Gratuity sufficient to retain the employees? Not really. The employees these days have high non-monetary expectations which might be equally or even more important than a monetary perk. However, Gratuity, without a doubt, is a good motivating factor.

comment on this article
share this article
Photo of Rishika Mukherjee

An Article By -

Rishika Mukherjee

218 Posts


295 Post Likes


Mukherjee is an avid reader and loves to write as much as read. She is the youngest of all but handles chores like a 50-year-old woman. She takes a lot on her plate and somehow, eerily manages to get the job done. As Hazel Grace stated, she could read a good author's grocery list, and so would Miss Mukherjee. 

Topics under this Article

Share your thoughts

We showed you ours, now you show us yours (opinions 😉)

no comments on this article yet

Why not start a conversation?

Looks like nobody has said anything yet. Would you take this as an opportunity to start a discussion or a chat fight may be.

Under Finance

"A few" articles ain't enough! Explore more under this category.

Share this post
share on facebook


share on twitter


share on whatsapp


share on linkedin


Or copy the link to this post -

copy url to this post