Gratuity vs. Provident Fund: Understanding the Differences


Gratuity and Provident Fund are two significant financial benefits that employers often offer to their employees as part of their retirement benefits package. While both serve the purpose of providing financial security to employees, they differ in their structure, eligibility criteria, and mode of operation. In this blog, we will delve into the differences between Gratuity and Provident Fund, shedding light on their respective features and importance in securing employees’ futures.


Gratuity is a lump sum payment made by an employer to an employee as a gesture of gratitude for the employee’s long and meritorious service. It is governed by the Payment of Gratuity Act, 1972, and applies to organizations employing ten or more employees. Gratuity is usually paid at the time of retirement, resignation, or the employee’s superannuation, i.e., reaching the age of retirement as per the company’s policy.

Key Features of Gratuity:

Eligibility: To be qualified for tip, a representative high priority finished at least five years of ceaseless help with the business.However, in the case of the employee’s death or disability, the requirement of five years of service is waived.

Calculation: The formula for calculating gratuity is (Last Drawn Salary × 15/26) × Number of Completed Years of Service.

Tax Benefits: Gratuity is tax-exempt up to a certain limit as per the Income Tax Act. The exempted limit is Rs. 20 lakh (as of the knowledge cutoff in September 2021). Any amount exceeding this limit is taxable.

Provident Fund (PF):

Provident Fund is a savings scheme that helps employees build a corpus for their retirement. It is governed by the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, and is applicable to organizations employing 20 or more employees. Both the employer and the employee contribute a certain percentage of the employee’s salary to the Provident Fund account.

Key Features of Provident Fund:


Both the employer and the employee make contributions to the Provident Fund account. The employee contributes 12% of their basic salary, and an equal amount is contributed by the employer.

Tax Benefits:

The contributions made by the employee to the Provident Fund are eligible for tax deductions under Section 80C of the Income Tax Act. The interest earned on the Provident Fund is tax-exempt.

Withdrawal Rules:

Employees can withdraw their Provident Fund balance partially or fully under specific circumstances, such as purchasing a house, medical emergencies, or after retirement. However, premature withdrawals are subject to certain restrictions.

Differences between Gratuity and Provident Fund:

Purpose: Gratuity is a one-time payment made as a token of appreciation for long service, while Provident Fund is a savings scheme designed to build a corpus for retirement.

Eligibility: Gratuity requires a minimum of five years of service, whereas Provident Fund is applicable from the very beginning of employment.

Calculation: Gratuity is calculated based on the employee’s last drawn salary and years of service, while Provident Fund contributions are based on a fixed percentage of the employee’s basic salary.

Tax Treatment: Gratuity has a tax-exempt limit, and any amount exceeding this limit is taxable. Provident Fund contributions are eligible for tax deductions, and the interest earned is tax-exempt.


Gratuity and PF are essential components of an employee’s retirement benefits, providing financial security and stability for their future. While both serve distinct purposes, they complement each other in ensuring employees’ welfare during their post-employment years. Employers must ensure proper administration of Gratuity and Provident Fund schemes, and employees should be aware of their entitlements and make use of these benefits wisely. By understanding the differences between Gratuity and Provident Fund, both employers and employees can make informed decisions, fostering a secure and prosperous retirement for the workforce.

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