Gratuity is a lump sum payment made by employers to recognize long-term service, governed by the Payment of Gratuity Act, 1972. Employees must complete a minimum of five years of continuous service to qualify for gratuity, although new labor codes effective from November 2025 allow fixed-term employees to receive gratuity after just one year of service. The gratuity amount is calculated using the formula: (Last Drawn Salary × 15 × Number of years of service) ÷ 26. For government employees, gratuity is fully exempt from taxes. However, private sector employees are subject to taxation on gratuity amounts exceeding ₹20 lakh (roughly $24,000 USD). The taxable portion is determined by comparing the actual gratuity received, the exemption ceiling, and the calculated gratuity amount, with the least value being tax-free. For instance, if the gratuity is ₹15 lakh, it is fully tax-exempt, while a gratuity of ₹25 lakh would see ₹20 lakh exempt and ₹5 lakh taxed according to the individual's income tax slab.