Gratuity is a statutory benefit provided to employees as a token of appreciation for their long-term service to an organization. It is a lump sum amount paid by the employer to the employee upon retirement, resignation, or termination after completing a minimum of 5 years of continuous service. The Payment of Gratuity Act, 1972 governs the payment of gratuity in India and applies to establishments with 10 or more employees.

Gratuity is calculated based on the employee's last drawn basic salary and dearness allowance (DA), along with the number of years of completed service. The standard formula considers 15 days of salary for each year of completed service, with the salary being calculated on the basis of 26 working days per month. This benefit acts as a form of financial security for employees and their families.

The calculation of gratuity depends on whether the organization is covered under the Payment of Gratuity Act or not. For covered organizations, the formula is: Gratuity = (Last Drawn Salary × 15) / 26 × Number of Years of Service.

• Last Drawn Salary includes basic pay plus dearness allowance
• 15 represents the number of days' wages for each year of service
• 26 is the number of working days in a month
• If service months exceed 6, it's rounded up to the next year

Gratuity received by government employees is fully exempt from income tax. For private sector employees covered under the Payment of Gratuity Act, the least of the following is exempt: actual gratuity received, 15 days' salary for each completed year of service, or 20 lakh rupees.

For employees not covered under the Act, the exemption is calculated as the least of: actual gratuity, half month's salary for each completed year, or 20 lakh rupees. Any amount exceeding the exemption limit is added to your income and taxed at your applicable slab rate.