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Gratuity Calculation India 2026: Formula & Rules

How gratuity is calculated under the Payment of Gratuity Act 1972, who qualifies, how the 15/26 formula works, and the ₹20 lakh tax exemption ceiling.

PushDraft Team •

Gratuity is a lump-sum payment your employer owes you when you leave a company — but only after you’ve completed a minimum tenure. It’s governed by the Payment of Gratuity Act, 1972 and is one of the most misunderstood components of Indian salary packages.

Eligibility — The Five-Year Rule

You qualify for gratuity only after 5 years of continuous service with the same employer. The main exceptions:

  • Death or disability: Eligible immediately (no minimum tenure).
  • 4 years and 240 days: Madras High Court (2018) held that completing 4 years + 240 days in the 5th year qualifies as 5 years of continuous service. Supreme Court hasn’t overruled this, so many employers honor it — but it’s not universal.

If you resign at 4 years 11 months in a company that follows the strict 5-year rule, you walk away with zero gratuity. This is why the 5-year mark matters enormously when planning a job switch.

The Gratuity Formula

For employees covered under the Gratuity Act:

$$Gratuity = \frac{15 \times \text{Last drawn monthly basic salary} \times \text{Years of service}}{26}$$

  • 15 represents 15 days of wages per completed year
  • 26 represents average working days in a month (excluding Sundays)
  • Last drawn means the final basic + DA (not full CTC, not gross)

Example

Priya, 8 years at her company, last basic salary ₹80,000/month:

$$Gratuity = \frac{15 \times 80{,}000 \times 8}{26} = ₹3{,}69{,}231$$

If her service was 8 years and 7 months, it rounds up to 9 years (any fraction over 6 months rounds up). If it was 8 years and 5 months, it stays at 8 years.

Tax Treatment Under Section 10(10)

Gratuity received is tax-exempt up to the lowest of these three amounts:

  1. ₹20,00,000 (lifetime cap across all employers, raised from ₹10L in 2019)
  2. Actual gratuity received
  3. 15/26 × last drawn salary × completed years of service

Any amount above this is added to your taxable income in the year you receive it.

Government Employees

Central and state government employees get full exemption regardless of amount — no ₹20L cap.

Non-Covered Employees

Some employers aren’t covered under the Gratuity Act (typically establishments with fewer than 10 employees). They may still pay gratuity voluntarily, but the formula changes to:

$$Gratuity = \frac{\text{Last drawn salary} \times 15 \times \text{Years of service}}{30}$$

(Half a month’s salary per year, instead of 15/26ths.) And tenure fractions are counted differently — rounding down instead of up.

What Counts as “Salary” for Gratuity?

Only basic salary + dearness allowance (DA). Not HRA, not bonuses, not perquisites, not stock options. This is why the basic component of your CTC matters for gratuity.

If your CTC is ₹15L but only 30% is basic (₹4.5L), your gratuity is calculated on ₹4.5L, not ₹15L. Employers who structure CTC with low basic components (to save on PF and gratuity costs) shortchange employees on both retirement benefits.

Rule of thumb: Negotiate for basic salary to be at least 40-50% of your CTC during salary negotiations. The long-term impact on gratuity + PF is significant.

When Gratuity Is Paid

Gratuity is payable within 30 days of it becoming due (usually your last working day). If the employer delays, they owe you simple interest at the prescribed rate (currently 10% per annum) from the due date until actual payment.

If the employer refuses to pay, file a claim with the Controlling Authority (Labour Commissioner) under the Act within 90 days. The authority can force payment with penalty.

Forfeiture of Gratuity

The employer can partially or fully forfeit gratuity only in specific cases:

  1. Willful damage to employer’s property (forfeiture up to extent of damage)
  2. Termination for disorderly conduct or violence (full forfeiture)
  3. Termination for an offense involving moral turpitude during employment (full forfeiture)

Resignation, layoffs, retrenchment, and routine performance terminations do not forfeit gratuity. This is a protection many employees don’t know about.

Common Mistakes

  1. Resigning at 4 years 11 months. Even one day under 5 years and many employers deny gratuity. Check your company’s policy before resigning.
  2. Thinking gratuity is calculated on CTC. It’s calculated on basic salary, which is typically 30-50% of CTC. Your actual gratuity is smaller than most online calculators show.
  3. Assuming it carries over between employers. Gratuity resets with each new employer. The 5-year clock restarts.
  4. Missing the ₹20L lifetime cap. Across your career, the total tax-exempt gratuity is capped at ₹20L. If you’ve already claimed the full exemption at an earlier job, a second exemption isn’t available.

Use Our Gratuity Calculator

Our Gratuity Calculator handles the 15/26 formula, rounding rules, and the ₹20L exemption cap. Compare job offers with our Compare Job Offers tool which includes gratuity as part of total compensation — an angle most “package comparison” tools ignore.