How Gratuity Works in India

Gratuity is a lump sum an employer pays an employee on exit as recognition of continuous service. For establishments covered by the Payment of Gratuity Act, it is a statutory entitlement rather than a discretionary bonus, and it is generally payable on resignation, retirement, or on death or disablement.

The commonly applied condition is five years of continuous service with the same employer. Employees who leave earlier usually do not receive gratuity, even though a gratuity provision may have been shown in their CTC every year. The Act provides an exception where service ends because of death or disablement.

This is why the gratuity line matters when you change jobs frequently: for a two-year stint, that portion of your CTC was never money you were going to see.

Gratuity = Last drawn basic (plus DA) × 15 ÷ 26 × Years of service

The 15/26 comes from fifteen days of wages for each completed year, with a month treated as 26 working days. Service beyond a completed year is commonly rounded up when the extra period is more than six months. Statutory caps on the maximum payable amount apply, and the cap and its tax treatment are set by law.

Take the second row: ₹30,000 × 15 ÷ 26 = ₹17,308 per completed year, and ₹17,308 × 5 = ₹86,538. Note that the calculation uses basic, not gross or CTC, which is another reason the basic component of your structure is worth knowing.

Employers fund gratuity over time, so they include an annual provision in your CTC — often in the region of 4.81% of basic, which is the yearly equivalent of 15/26 of a month’s wages. That provision is a real cost to the company, so including it in CTC is not dishonest. It is simply not part of your monthly or even annual income.

When comparing two offers, strip gratuity out of both CTC figures along with employer PF and insurance, and compare what is left. Our CTC guide walks through that normalisation.

• Gratuity is calculated on last drawn basic, not on average salary across your tenure.
• It is based on completed years of service, not on the number of appraisals you received.
• It is paid on exit, not annually, despite appearing in every year’s CTC.
• Notice period served is generally counted as service; a bought-out period may not be.

Coverage, the eligibility period, the statutory ceiling and the tax exemption limit are governed by legislation and can be amended. Nothing here is legal or tax advice. Check the current position with official sources or a qualified professional, and confirm your own entitlement with your employer’s HR team.