Gratuity

Gratuity is a lump-sum payment an employer makes to an employee as recognition of long-term service, governed by the Payment of Gratuity Act, applicable to establishments with 10 or more employees. Eligibility requires at least five continuous years of service with the same employer — except on death or disablement, where the five-year rule is waived and the payout is fully tax-exempt with no ceiling.

Even though gratuity forms part of many CTC structures, it's generally not deducted from the monthly payslip — employers instead make an accounting provision toward future gratuity obligations, factored into overall CTC. Employees receive gratuity equivalent to 15 days' wages for every completed year of service.

Gratuity is tax-exempt only up to ₹20 lakh under Section 10(10) for employees covered by the Act (fully exempt for government employees). Amounts above that are taxable. "Last drawn salary" in the formula means Basic + DA.