Gratuity, under the Payment of Gratuity Act, 1972, is a one-time payment for continuous service, generally payable after 5 years (waived on death/disablement). Formula: last-drawn (basic + DA) × 15/26 × years of service. Employers accrue for it as a cost (part of CTC) even though it's paid only on exit.
In India
Tax-exempt up to ₹20 lakh for covered private-sector employees. Many employers fund the liability via a group gratuity insurance/trust to manage cash flow.
In practice
An employee leaves after 8 years with final basic+DA of ₹52,000. Gratuity = 52,000 × 15/26 × 8 = ₹2,40,000, paid tax-free on exit.