Formula: (15 × last drawn salary × years) ÷ 26. 5-year minimum. ₹20L lifetime tax cap (private). Government 100% exempt. Death/disability — no minimum.
GRATUITY FORMULA (Payment of Gratuity Act 1972): GRATUITY = (15 × Last Drawn Salary × Years of Service) ÷ 26. LAST DRAWN SALARY = basic + DA (no allowances). 26 = average working days per month. EXAMPLE: ₹50K basic + DA, 20 years service. Gratuity = (15 × 50K × 20) ÷ 26 = ₹5.77L. TAX EXEMPT under Section 10(10). MIN SERVICE: 5 years (4 years 240 days for season workers). ELIGIBLE EVENTS: retirement, resignation, termination, death.
GRATUITY TAX EXEMPTION SECTION 10(10): LOWER OF: (1) ACTUAL gratuity received. (2) FORMULA calculation. (3) ₹20 LAKH LIFETIME LIMIT. EXAMPLE 1: ₹5.77L received = ₹5.77L exempt (below ₹20L). EXAMPLE 2: ₹25L received = ₹20L exempt + ₹5L taxable. ₹20L = LIFETIME LIMIT (not per employer). Multiple gratuity events: cumulative limit. STRATEGIC: high gratuity payouts (senior executives) often exceed ₹20L — tax planning critical.
5-YEAR MINIMUM SERVICE for gratuity: (1) CONTINUOUS service required. (2) RETIREMENT, resignation, termination AFTER 5 years. (3) DEATH in service: NO minimum (family receives gratuity). (4) DISABILITY: NO minimum. EXCEPTION: SEASONAL workers (4 years 240 days). RESIGNATION before 5 years: NO gratuity entitlement. JOB-HOPPING: may lose gratuity if employed < 5 years per employer. STRATEGIC: stay 5+ years at employer for gratuity benefit. Add ₹2-5L typically for senior roles.
GOVERNMENT EMPLOYEES (Central/State/PSU): (1) ENTIRE gratuity TAX EXEMPT (no ₹20L cap). (2) Pension Rules-based formula. (3) HIGHER amounts possible. (4) DCRG (Death-cum-Retirement Gratuity). PRIVATE SECTOR EMPLOYEES: (1) Subject to Section 10(10) ₹20L LIFETIME limit. (2) PAYMENT OF GRATUITY ACT 1972 applies. (3) 26-day formula. (4) Above ₹20L taxable at slab rate. UNORGANIZED SECTOR: voluntary in many companies. STRATEGIC: government job gratuity 100% tax-free, private cap at ₹20L.
GRATUITY STRATEGY: (1) STAY 5+ YEARS for entitlement. (2) NEGOTIATE high gratuity component in CTC if senior role. (3) ₹20L MULTIPLE EMPLOYERS: lifetime cap (not per employer). (4) RETIREMENT GIFT FROM EMPLOYER on top of gratuity: separate tax treatment. (5) FAMILY (death gratuity): same tax treatment for nominee. (6) PENSION + GRATUITY combination at retirement: tax planning critical. (7) NRI returning: gratuity from foreign job + Indian job — separate treatment. (8) RECEIVING ₹25L gratuity: pay 30% on ₹5L taxable = ₹1.5L tax. (9) Government employees: ZERO tax burden — significant advantage. CONSULT CA for retirement-year planning.