Banking term

Gratuity

A plain-English definition of Gratuity— what it means, how it works, and a simple example.

Quick answer

Gratuity is a lump-sum reward an employer pays for long service, usually after five or more years with the same company.

Gratuity rewards loyalty. Under the Payment of Gratuity Act, employees who complete at least five continuous years qualify for a payout when they resign, retire or are laid off.

The standard formula is your last drawn monthly salary (basic plus dearness allowance) multiplied by 15/26, multiplied by the number of completed years of service. So 10 years at a ₹50,000 basic works out to about ₹2.88 lakh.

Gratuity up to ₹20 lakh is tax-free for most employees, making it a valuable retirement benefit. It sits alongside EPF as part of the corpus you build simply by staying employed.

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A note on accuracy:this definition is for general education, not personalised financial or tax advice. Figures are illustrative and rules can change — confirm anything that affects a real decision.