What is Gratuity?
Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for continuous service of 5 years or more, payable at retirement, resignation, or termination. It is governed by the Payment of Gratuity Act, 1972, and is tax-free up to ₹20 lakh.
For employees covered under the Act, gratuity is calculated as (Last Drawn Salary × 15 × Years of Service) ÷ 26 — using a 26-day month convention, since 4 days are treated as weekly offs.
Formula
Gratuity = (Last Salary × 15 × Years of Service) ÷ 26