What Is Gratuity? Meaning, Calculation Formula, Eligibility & Tax Rules (2026)

Gratuity is a financial benefit paid by employers to employees as a token of appreciation for their service. It is governed by the Payment of Gratuity Act, 1972, and applies to employees who have completed at least five years of continuous service with an organisation.

Example:

If your basic salary is Rs. 50,000 and you have worked for 10 years, your gratuity amount can be calculated as:

Gratuity = (Basic Salary × Tenure × 15) ÷ 26
= (50,000 × 10 × 15) ÷ 26 = Rs. 2,88,461

A step-by-step guide to accessing gratuity-related financial services

To manage gratuity effectively, it is important to access financial services via trusted platforms like the Bajaj Finserv Service Portal. Follow these steps to access your gratuity-related documents:

1. Log in to the Bajaj Finserv Service Portal: Use your registered mobile number or email ID to log in.
2. Navigate to the Gratuity Section: Access the dedicated section for gratuity or loans.
3. Input necessary details: Enter your employment details, such as tenure and salary, to calculate or view your gratuity amount.
4. Download relevant documents: Download your gratuity statement, NOC, or any other required governance documents.

Gratuity typically forms 4.81% of your Cost-To-Company (CTC). Here is why it is significant:

• It ensures financial security post-employment.
• It reflects the employer’s commitment to employee welfare.
• It is a tax-efficient component of your salary.

Calculation:

If your annual CTC is Rs. 10 lakh, the gratuity component would be:
Gratuity = 4.81% of Rs. 10,00,000 = Rs. 48,100

Gratuity is subject to taxation under Indian law, but certain exemptions apply as per Section 10(10) of the Income Tax Act. Here is a breakdown of how gratuity is taxed:

• For government employees: Gratuity is fully exempt from tax.
• For private sector employees: Tax exemption is available up to Rs. 20 lakh during their lifetime. Any gratuity amount exceeding this limit is taxable.

Example:

If an employee receives Rs. 25 lakh as gratuity, Rs. 20 lakh will be tax-exempt, and the remaining Rs. 5 lakh will be taxable as per the applicable income tax slab.

Pro tip: Ensure you consult a tax advisor to optimise your tax liabilities on gratuity payouts.

New gratuity rules under Code on Social Security 2020

The Code on Social Security 2020 introduces major reforms to employee benefits, significantly modernising gratuity rules. A primary change is the reduction of the eligibility threshold for fixed-term contract employees. Instead of completing the traditional five years of continuous service, contract workers now qualify for pro-rata gratuity after just one single year. 

Furthermore, the code enforces a standardised definition of "wages", mandating that basic pay and dearness allowance must comprise at least 50% of an employee’s total cost-to-company (CTC). If special allowances exceed 50% of the total remuneration, the excess amount is automatically added back to the core wages. This new salary structuring rule substantially increases the base salary used for calculations, ultimately boosting final gratuity payouts for the modern workforce while formalising protections for gig and contract workers. 

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