When is an employee eligible for gratuity in India and how is it calculated?

The Payment of Gratuity Act applies to establishments with 10 or more employees, and the standard eligibility rule is 5 years of continuous service, though this requirement is waived in case of death or disablement. The calculation formula is (last drawn basic salary + dearness allowance) × 15/26 × number of completed years of service, with 26 representing the standard working days in a month; any service period of 6 months or more beyond a completed year is rounded up to the next full year.

Gratuity is currently exempt from tax up to ₹20 lakh in aggregate over an employee's career, and unlike PF, it's typically an unfunded liability that the employer pays directly (though many companies choose to fund it through a group gratuity insurance policy to smooth out the cash flow impact). For financial planning purposes, companies with growing India headcount should account for accruing gratuity liability on their books from year one of an employee's tenure, even though the cash payout itself only happens on exit after 5 years.