Gratuity

Gratuity is a lump-sum benefit paid by an employer to an employee on exit, in recognition of long and continuous service. It is a statutory entitlement in India under the Payment of Gratuity Act, which applies to establishments above a defined size and becomes payable on resignation, retirement, death, or disablement, provided the employee has completed the qualifying period of service. It functions as a form of end-of-service reward rather than an ongoing benefit.

The entitlement generally vests after five years of continuous service with the same employer, with exceptions for death or disablement where the five-year rule is waived. The amount is calculated by a statutory formula based on the employee’s last-drawn salary and years of service, subject to a legal cap. Because gratuity accrues over an employee’s tenure, employers typically provision for it as a liability rather than paying it out year by year, and it forms part of the total cost of employing someone.

For Indian offers, gratuity is one of the components that sits within Cost to Company but is not received in monthly pay — the employee only realises it on qualifying exit. Alongside Provident Fund, it is a reason CTC exceeds both gross and net pay. In Global Capability Centres, where retention over multiple years is a strategic goal, gratuity is part of the long-service economics of employment, and understanding it helps candidates and employers read the true value and structure of a compensation package.