{"id":5608,"date":"2021-03-15T11:10:32","date_gmt":"2021-03-15T05:40:32","guid":{"rendered":"https:\/\/razorpay.com\/learn\/?p=5608"},"modified":"2025-04-24T22:22:59","modified_gmt":"2025-04-24T16:52:59","slug":"what-is-gratuity","status":"publish","type":"post","link":"https:\/\/razorpay.com\/payroll\/learn\/what-is-gratuity\/","title":{"rendered":"Gratuity &#8211; Meaning, Formula, Calculation and Taxation Rules"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">Gratuity constitutes a small part of employee compensation. In this article, we\u2019ll detail everything about gratuity\u2014its meaning, eligibility criteria, calculation formulas, and taxation rules.<\/span><\/p>\n<p>If you already know about gratuity and want to simply calculate it, use our <a href=\"https:\/\/razorpay.com\/payroll\/gratuity-calculator\/\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">free online Gratuity Calculator here<\/a>. All you need to do is put in your monthly salary and years of service and we&#8217;ll calculate gratuity for you!<\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_80 counter-hierarchy ez-toc-counter ez-toc-transparent ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69d64b927ddb2\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69d64b927ddb2\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/razorpay.com\/payroll\/learn\/what-is-gratuity\/#What-is-gratuity\" >What is gratuity?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/razorpay.com\/payroll\/learn\/what-is-gratuity\/#Eligibility-criteria-for-gratuity-payment-in-India\" >Eligibility criteria for gratuity payment in India<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/razorpay.com\/payroll\/learn\/what-is-gratuity\/#Gratuity-calculator\" >Gratuity calculator<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/razorpay.com\/payroll\/learn\/what-is-gratuity\/#Gratuity-calculation-formula\" >Gratuity calculation formula<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/razorpay.com\/payroll\/learn\/what-is-gratuity\/#Calculation-of-gratuity-in-case-of-death-of-an-employee\" >Calculation of gratuity in case of death of an employee<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/razorpay.com\/payroll\/learn\/what-is-gratuity\/#Income-tax-on-gratuity\" >Income tax on gratuity<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/razorpay.com\/payroll\/learn\/what-is-gratuity\/#How-to-calculate-the-gratuity-amount\" >How to calculate the gratuity amount?<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What-is-gratuity\"><\/span><b>What is gratuity?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Gratuity is the amount employees receive as a part of their gross compensation from their employer. It\u2019s regulated under the <\/span><a href=\"https:\/\/clc.gov.in\/clc\/sites\/default\/files\/PaymentofGratuityAct.pdf\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\"><span style=\"font-weight: 400;\">Payment of Gratuity Act, 1972<\/span><\/a><span style=\"font-weight: 400;\">, and is offered as a token of appreciation for an employee\u2019s services to the company.\u00a0<\/span><\/p>\n<p>The law applies to employees of factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments with 10 or more employees. All kinds of government jobs are also covered under this act. It extends to all states of India except Jammu and Kashmir.<\/p>\n<p><span style=\"font-weight: 400;\">To be eligible for gratuity, an employee should have completed at least 4 years 8 months of employment in the company. However, this condition isn&#8217;t applicable in the case of employee disability or death due to an accident or severe illness.<\/span><\/p>\n<p><strong>Related Read: <a href=\"https:\/\/razorpay.com\/learn\/what-is-ex-gratia-payment\/\"><em>What Is an Ex-Gratia Payment? <\/em><\/a><\/strong><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Eligibility-criteria-for-gratuity-payment-in-India\"><\/span><b>Eligibility criteria for gratuity payment in India<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Employees must fulfil the following criteria to be eligible for receiving the gratuity payment:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">On superannuation i.e. when an employee attains a pre-fixed age defined in a company&#8217;s superannuation plan. A superannuation plan is a company\u2019s pension plan for its employees.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">If they are retiring from work or resigning after completing 4 years 8 months years of uninterrupted employment.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">If they are disabled due to an accident or sickness, in which case the minimum employment period (4 years 8 months) becomes irrelevant.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">If an employee dies due to serious illness, the minimum employment period condition isn&#8217;t applicable again. In this case, the nominee becomes the recipient of gratuity.<\/span><\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Gratuity-calculator\"><\/span><b>Gratuity calculator<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Employers can use a simple formula to<\/span><span style=\"font-weight: 400;\"> determine the gratuity amount to be paid to the employees.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Gratuity-calculation-formula\"><\/span><b>Gratuity calculation formula<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">For employees under the purview of the Gratuity Act, the formula used for calculating the gratuity amount is as follows:<\/span><\/p>\n<p><b>Gratuity = (Years of service x Last drawn basic salary) 15\/ 26<\/b><\/p>\n<p><span style=\"font-weight: 400;\">where the last drawn salary includes basic salary and dearness allowance.<\/span><\/p>\n<p><b>Example: <\/b><span style=\"font-weight: 400;\">If Deepika has served for 15 years in a company and her last drawn salary (including basic salary and dearness allowance) was Rs. 25000, then:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Gratuity amount for Deepika = (15 <\/span><b>\u00a0<\/b><span style=\"font-weight: 400;\">x\u00a0 25,000) 15\/ 26 = Rs. 2,16,346.154<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Some important points to be noted:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">If the number of months in the last year of service is more than six months, it is rounded up to the nearest integer. Otherwise, it is rounded down to the nearest integer. For example, 20 years 7 months tenure is treated as 21 years, while 20 years 5 months is treated as 20 years.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">As per the Gratuity Act, if the gratuity amount exceeds the limit of Rs. 20 lakh, then the surplus amount is treated as ex-gratia. Ex-gratia payments are voluntary payments made by an organisation as a favour or incentive to employees and do not fall under any law obligation.<\/span><\/li>\n<li aria-level=\"1\">As per the Act, an employer can forfeit the gratuity payment, partially or wholly, in case of any misconduct or act of violence by an employee.<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Calculation-of-gratuity-in-case-of-death-of-an-employee\"><\/span><b>Calculation of gratuity in case of death of an employee<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">In case of an unfortunate event like the death of an employee, the gratuity payment is calculated based on the employee\u2019s service tenure. Here again, there is a capping limit of Rs. 20 lakh. Refer to the table below to calculate gratuity:<\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td style=\"text-align: center;\"><strong>Service Tenure<\/strong><\/td>\n<td style=\"text-align: center;\"><strong>Gratuity Amount Payable<\/strong><\/td>\n<\/tr>\n<tr>\n<td style=\"text-align: center;\"><span style=\"font-weight: 400;\">Less than a year<\/span><\/td>\n<td style=\"text-align: center;\"><span style=\"font-weight: 400;\">2 x basic salary<\/span><\/td>\n<\/tr>\n<tr>\n<td style=\"text-align: center;\"><span style=\"font-weight: 400;\">1 year or more but less than 5 years<\/span><\/td>\n<td style=\"text-align: center;\"><span style=\"font-weight: 400;\">6 x basic salary<\/span><\/td>\n<\/tr>\n<tr>\n<td style=\"text-align: center;\"><span style=\"font-weight: 400;\">5 years or more but less than 11 years<\/span><\/td>\n<td style=\"text-align: center;\"><span style=\"font-weight: 400;\">12 x basic salary<\/span><\/td>\n<\/tr>\n<tr>\n<td style=\"text-align: center;\"><span style=\"font-weight: 400;\">11 years or more but less than 20 years<\/span><\/td>\n<td style=\"text-align: center;\"><span style=\"font-weight: 400;\">20 x basic salary<\/span><\/td>\n<\/tr>\n<tr>\n<td style=\"text-align: center;\"><span style=\"font-weight: 400;\">20 years or more<\/span><\/td>\n<td style=\"text-align: center;\"><span style=\"font-weight: 400;\">1\/2\u00a0 of the basic salary for each completed six-monthly period. (It is subject to a maximum of 33 x\u00a0 basic salary.)<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h2><span class=\"ez-toc-section\" id=\"Income-tax-on-gratuity\"><\/span><b>Income tax on gratuity<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The taxation rules around gratuity amount primarily depend on whether an employee is employed with a government or a private entity.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">For (central\/ state\/ local) government employees, the entire gratuity amount is exempted from income tax.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">For private employees, the least of the following three amounts is exempted from income tax:<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">\u00a0 \u00a0 \u00a0 a) The eligible gratuity<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u00a0 \u00a0 \u00a0 b) The actual amount of gratuity received<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u00a0 \u00a0 \u00a0 c) Rs. 20 lakh<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"How-to-calculate-the-gratuity-amount\"><\/span><b>How to calculate the gratuity amount?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Calculating gratuity amount manually can be tedious and error-prone. Things only get worse when a business scales and there is a huge list of employees with different basic pays, allowances, and commissions. It\u2019s like running in a marathon with bare feet and hoping to win. Just like athletes need shoes, smart businesses require automated tools for tasks such as gratuity calculation and employee <\/span><a href=\"https:\/\/razorpay.com\/payroll\/what-is-payroll-definition-process-complete-guide\/\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\"><span style=\"font-weight: 400;\">payroll<\/span><\/a><span style=\"font-weight: 400;\">. This helps them to stay ahead of the curve, save precious time, and scale effortlessly.<\/span><\/p>\n<p><a href=\"https:\/\/razorpay.com\/payroll\/?r=blog_cta_gratuity\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\"><span style=\"font-weight: 400;\">RazorpayX Payroll<\/span><\/a><span style=\"font-weight: 400;\"> has an inherent feature that uses the gratuity formula to calculate the amount as part of its payroll processing system. This can make life easier for you when calculating it for different employees. The exact gratuity amount will be captured in the payroll in a matter of clicks, after providing the following inputs:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Select whether or not you are covered under the Gratuity Act<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Input the basic salary, dearness allowance, and commissions, whichever is applicable<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Input the number of years of service<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">And voila! Your payroll processing is completed, and along with it, the gratuity amount calculation is also done.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">With RazorpayX Payroll, you won\u2019t have to worry about gratuity (or payroll) calculations ever again. Not convinced?<\/span><\/p>\n<div style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/payroll.razorpay.com\/signup?r=Gratuity_blog\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">Take RazorpayX Payroll for a Free Test Drive<\/a><\/div>\n<p><strong>Read more:<\/strong><\/p>\n<p><a href=\"https:\/\/razorpay.com\/payroll\/\"><span style=\"font-weight: 400;\">Payroll Software<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/payroll\/what-is-payroll\/\"><span style=\"font-weight: 400;\">What is Payroll<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/payroll\/learn\/payroll-process\/\"><span style=\"font-weight: 400;\">Payroll Process<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/payroll\/learn\/payroll-management-system-software\/\"><span style=\"font-weight: 400;\">Payroll Management<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/payroll\/learn\/hris-human-resource-information-system\/\"><span style=\"font-weight: 400;\">HRIS<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/payroll\/leave-attendance-management\/\"><span style=\"font-weight: 400;\">Leave Attendance Management<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/payroll\/attendance-management-system\/\"><span style=\"font-weight: 400;\">Attendance Management System<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/payroll\/hr-software\/\"><span style=\"font-weight: 400;\">HR Software<\/span><\/a><\/p>\n<h3><b>FAQs on gratuity<\/b><\/h3>\n\t\t\t<div id=\"rank-math-rich-snippet-wrapper\" class=\"\">\n\n\t\t\t\t\n\t\t\t<\/div>\n\t\t\n","protected":false},"excerpt":{"rendered":"<p>Gratuity is the amount employees receive as a part of their gross compensation from their employer.  It&#8217;s offered as a token of appreciation for an employee\u2019s services to the company. Read everything about gratuity in this blog post. <\/p>\n","protected":false},"author":151156494,"featured_media":5615,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3404],"tags":[3633],"class_list":{"0":"post-5608","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-payroll","8":"tag-gratuity"},"_links":{"self":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/5608","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/users\/151156494"}],"replies":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/comments?post=5608"}],"version-history":[{"count":24,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/5608\/revisions"}],"predecessor-version":[{"id":17027,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/5608\/revisions\/17027"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media\/5615"}],"wp:attachment":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media?parent=5608"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/categories?post=5608"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/tags?post=5608"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}