Gratuity
A lump-sum payment from employer to employee for continuous service of five years or more, calculated under the Payment of Gratuity Act, and partly exempt from tax.
Gratuity is a statutory benefit paid by an employer to an employee who has completed at least five years of continuous service, payable on retirement, resignation, or in specific circumstances like death or disability, where the five-year requirement doesn't apply. For employees covered under the Payment of Gratuity Act, the formula is 15 times the last drawn salary times the number of years of service, divided by 26.
Gratuity received is exempt from tax up to specified limits under Section 10(10): fully exempt for government employees, and exempt up to a specified ceiling, currently ₹20 lakh, aggregated across employers over a lifetime, for private sector employees covered by the Act, with amounts above that ceiling taxable as salary income.
This glossary entry is for general informational purposes only and does not constitute professional tax, legal, or financial advice. Rules and rates change, so consult a qualified Chartered Accountant for advice specific to your situation.