Gratuity Calculator: Can You Receive Gratuity Before 5 Years? Is It Tax-Free? Check Benefits And Eligibility

Gratuity is a lump sum payment given by an employer to an employee as a reward for long-term service. It is governed by the Payment of Gratuity Act, 1972 and is typically paid when an employee completes five years of continuous service.

The amount is calculated based on an employee’s basic salary, dearness allowance (DA), and commission. Gratuity serves as financial security for employees when they retire, resign, or leave due to specific reasons like disability or death.

An employee becomes eligible for gratuity after completing five years of continuous service in a company. However, in some cases, employees who have worked for 4 years and 240 days may also qualify for gratuity, as per the rules outlined in the Payment of Gratuity Act, 1972. 

According to Section 4(1) of the Payment of Gratuity Act, 1972, gratuity is usually paid after an employee completes five years of service. However, Section 2A defines continuous service as working for at least 240 days in a year, which can impact gratuity eligibility in certain cases.  

If a company operates for less than six days a week, an employee must complete 190 working days per year to meet the continuous service requirement. In a six-day workweek, the requirement increases to 240 working days per year. 

If an employee completes 240 days in the fifth year, it is considered a full year, making them eligible for gratuity. It is important to note that the employees who have worked for only 4 years and 6 months or 4 years and 6 months + 1 day do not qualify for gratuity.  

Gratuity is based on an employee’s last drawn salary and years of service.

Gratuity is calculated using the formula: (15 × Last Monthly Salary × Total Years of Service) ÷ 26. The last monthly salary includes the basic salary, dearness allowance (DA), and commission. The factor 15/26 is used because a month is considered to have 26 working days, and gratuity is based on 15 days' salary. Adding further, if an employee has worked for more than six months in a year, it is counted as a full year for gratuity calculation.  

Gratuity is calculated based on the last drawn basic salary, meaning any salary increase directly impacts the gratuity amount. This is particularly significant after annual appraisals, as a higher salary leads to a higher gratuity payout. 

Under income tax laws, gratuity can be taxable or tax-free, depending on the amount received. Employees are eligible for a tax exemption on gratuity up to Rs 20 lakh over their lifetime. Any amount exceeding this limit is subject to taxation as per applicable tax rules.