Gratuity is one of those benefits employees know exists but rarely understand the specifics of — until they're actually leaving a job and trying to figure out what they're owed.
The eligibility rule people get wrong
Gratuity requires 5 years of continuous service with the same employer — and importantly, this applies regardless of why you're leaving, including voluntary resignation. It's not limited to retirement or termination by the employer, a common misconception. The 5-year rule doesn't apply in cases of death or disability, where gratuity becomes payable regardless of tenure.
How the amount is calculated
For employees covered under the Payment of Gratuity Act, the formula is: (15 ÷ 26) × last drawn monthly salary (basic + DA) × number of completed years of service. A service period of 6 months or more past a work anniversary is typically rounded up to the next full year, though this can vary by company policy.
Tax treatment
Gratuity up to ₹20 lakh is tax-exempt for private-sector employees — this is a lifetime cumulative limit across all employers, not a per-employer allowance. Government employees typically receive full tax exemption on gratuity with no cap. Any amount received beyond the ₹20 lakh cumulative limit becomes taxable as regular income.
What if your company isn't covered under the Payment of Gratuity Act?
Some smaller establishments (typically those with fewer than 10 employees) may not be covered under the Act, though many still pay gratuity under their own policy using a similar or identical formula. Check your specific employment terms rather than assuming coverage either way.