Gratuity: Definition, Meaning & Guide for Indian Businesses

Gratuity is a lump-sum payment to employees who complete 5+ years of service. Calculation: (last drawn salary × 15 days × years of service) / 26.

What is Gratuity?

Under the Payment of Gratuity Act 1972, employees who complete 5 years of continuous service in an establishment with 10+ employees are entitled to gratuity on resignation, retirement, death or disability. Formula: (Basic + DA) × 15 × years of service ÷ 26. Maximum ₹20 lakh (tax-free). Death/disability: 5-year requirement waived. Employer must obtain group gratuity insurance from LIC or pay from reserves. Gratuity above ₹20 lakh is taxable. Failure to pay attracts 8-10% interest + criminal proceedings.