Gratuity

Eligibility and the formula

An employee becomes eligible after five years of continuous service with the same employer, on superannuation, retirement, resignation, or death or disablement (where the five-year condition is waived). Gratuity is (last drawn basic + DA) × 15 ÷ 26 × completed years of service. A fraction of service of six months or more counts as a full year, so 7 years and 7 months counts as 8 years.

The 15/26 factor represents fifteen days' wages for each year, using 26 working days as the month. The statutory ceiling is ₹20 lakh; employers may pay more under a contract or scheme but the excess is not tax-exempt.

• Eligibility: 5 years of continuous service (waived on death or disablement)
• Formula: (basic + DA) × 15 ÷ 26 × completed years
• Six months or more in the final year rounds up to a full year
• Ceiling ₹20 lakh; payable within 30 days of becoming due

Tax treatment

For private-sector employees covered by the Act, gratuity received is exempt from income tax up to ₹20 lakh across the employee's lifetime. Amounts above the statutory formula or above ₹20 lakh are taxable as salary in the year of receipt. Payroll should show gratuity in the full-and-final settlement separately from salary so that the exemption is applied correctly in Form 16.

Provisioning in CTC and the cash-flow trap

Many employers include gratuity in CTC at 4.81% of basic plus DA, which is 15 ÷ 26 ÷ 12 expressed as a percentage. Including it in CTC is a presentation choice; the liability is statutory whether or not it is shown. The trap is quoting it in CTC without setting money aside, then facing a lump sum of several lakh when a long-serving employee resigns.

The Code on Wages definition of wages also applies here: if allowances exceed 50% of remuneration, the add-back increases the gratuity base. Security agencies with guards deployed for years at the same client should track continuous service carefully, because transfers between sites do not break service.