Gratuity is a financial reward given by employers to employees as a mark of appreciation for long-term service. It serves as a retirement benefit and is regulated by the Payment of Gratuity Act, 1972. If your last drawn basic salary is Rs 60,000 and you’ve completed 7 years and 11 months of service, you may be entitled to a substantial gratuity payout.

Here’s a comprehensive breakdown of eligibility, calculation method, service rules, and tax benefits to help you understand what you’re entitled to.

What Is Gratuity?

Gratuity is a lump sum amount paid by an employer to an employee for rendering continuous service over a period of time. It’s typically received during retirement, job switch, or unfortunate events like disability or death, offering financial stability during such transitions.

Who Can Claim Gratuity?

You’re eligible if:

• You work in an establishment with 10 or more employees.
• You’ve completed at least 5 years of continuous service.
• You’re employed in sectors such as factories, mines, offices, railways, etc.

When Is Gratuity Paid?

• Gratuity becomes payable under the following scenarios:
• Voluntary resignation after completing 5 years
• Retirement or superannuation
• Termination by the employer
• Disablement due to illness or accident
• Death, in which case the amount is paid to the nominee or legal heirs

Minimum Service Requirement

• To receive gratuity, the employee must have completed a minimum of 5 years of continuous service.
• Important: If the service in the final year is 6 months or more, it is rounded up to a full year.

Rounding Off Years of Service

Here’s how service duration is rounded:

• 7 years 1 month = Counted as 7 years
• 7 years 11 months = Counted as 8 years
• 8 years 6 months or more = Counted as 9 years

Who Must Offer Gratuity?

Any organisation that has employed 10 or more people at any time in the last 12 months is legally required to pay gratuity. Once covered under the Gratuity Act, the company must continue complying with it—even if the number of employees falls below 10 later.

How Is Gratuity Calculated?

Gratuity is based on:

Last drawn basic salary

Number of years of service (rounded up if applicable)

Formula:

Gratuity = (Last Drawn Salary × Years of Service × 15) / 26

Where:

15 represents 15 days’ salary for every completed year

26 is considered the average number of working days in a month

Example Calculation: Rs 60,000 Salary, 7 Years 11 Months Service

Rounded service period: 8 years
Gratuity = (60,000 × 8 × 15) / 26 = Rs 2,76,923 (approx.)

Tax Implications

• Government employees: Entire gratuity amount is fully tax-exempt.
• Private sector employees: Tax exemption available up to Rs 20 lakh as per Income Tax rules.

Understanding gratuity rules empowers you to plan better for your financial future. Whether you’re nearing retirement or switching jobs, knowing what you’re entitled to can help you make informed decisions.