Key idea
A lump sum your employer owes you for sticking around. It is a legal right, not a favour, and it is largely tax-free.
Gratuity is a reward for long service, paid when you leave a company you have worked at for five years or more. It is your legal entitlement under the Payment of Gratuity Act, not a discretionary bonus.
The formula
Gratuity = Last basic + DA × 15 / 26 × years of service
A worked example
| If your… | is | then |
|---|---|---|
| Last basic + DA (monthly) | ₹50,000 | |
| Years of service | 10 years | |
| Gratuity | ₹2,88,461 |
The 15/26 reflects roughly fifteen days of pay for each completed year, counting twenty-six working days a month. Service beyond six months in the final year usually rounds up to a full year.
The tax part
For private-sector employees, gratuity is tax-free up to ₹20 lakh over your lifetime; anything above that is taxable. For most salaried careers, the full amount lands tax-free. It is real money worth remembering when you resign, because it is easy to forget to claim.
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