Definition
Gratuity
Gratuity is a lump-sum payment an employer gives an employee for long service, generally payable after completing five years, with tax exemption up to a prescribed limit.
Gratuity rewards long service. Under the Payment of Gratuity Act, it is typically payable when you leave after completing five years of continuous service (with exceptions for death or disability). It is calculated using a formula based on your last-drawn basic (plus DA) and years of service.
Gratuity received is tax-exempt up to a prescribed ceiling; amounts above the limit are taxable. Government employees often get fuller exemption. The five-year condition can be relaxed in cases of death or permanent disability.
Gratuity is a meaningful retirement benefit, often included in CTC as an employer cost even though you receive it only on exit after qualifying service.
Related terms
- Leave EncashmentLeave encashment is payment received for accumulated unused leave, typically at retirement or resignation, with specific tax exemptions for certain employees.
- EPF (Employer & Employee Split)The Employees' Provident Fund is a retirement savings scheme where both you and your employer contribute a percentage of basic pay each month, building a corpus that earns interest.
- Full and Final SettlementFull and final settlement (F&F) is the process of clearing all dues between employer and employee when employment ends, netting off salary, benefits and recoveries.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.