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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.

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Gratuity is a lump-sum payment your employer owes you when you leave — but only after you’ve crossed the minimum service threshold. It’s governed by the Payment of Gratuity Act, 1972 and is one of those salary components most people don’t think about until they’re about to resign.

That’s a mistake. The five-year timing decision alone can cost you lakhs.

Eligibility — The Five-Year Rule

You qualify for gratuity only after completing 5 years of continuous service with the same employer.

Two exceptions worth knowing:

  • Death or disability: Gratuity is payable immediately regardless of how long the employee has worked.
  • 4 years and 240 days: The Madras High Court held in 2018 that completing 4 years + 240 days in the 5th year qualifies as 5 continuous years. The Supreme Court hasn’t overruled this, so many employers honor it — but enforcement is uneven. Some companies follow the strict 5-year rule.

If you resign at 4 years 11 months in a company following the strict rule, you walk away with zero gratuity. One month short. This is exactly why your resignation timing matters more than most people acknowledge when switching jobs.

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 = 15 days of wages per completed year
  • 26 = average working days per month (Sundays excluded)
  • Last drawn = final basic salary + dearness allowance — not your full CTC, not your gross

Example

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

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

Now the rounding rule: if her service was 8 years and 7 months, it rounds up to 9 years — any fraction over 6 months counts as a full year. If it was 8 years and 5 months, it stays at 8. Plan your exit date accordingly.

Tax Treatment Under Section 10(10)

Gratuity is exempt from tax up to the lowest of:

  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 gets added to your taxable income for that year.

Government Employees

Central and state government employees get full exemption — no ₹20L cap applies to them.

Non-Covered Employees

Establishments with fewer than 10 employees typically fall outside the Gratuity Act. These employers may still pay gratuity voluntarily, but the formula changes:

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

That’s half a month’s salary per year instead of 15/26ths. And the rounding is different too — fractions are rounded down, not up.

What Counts as “Salary” for Gratuity?

Only basic salary + dearness allowance (DA). Not HRA. Not bonuses. Not perquisites or stock options.

Here’s why this matters: if your CTC is ₹15L but only 30% is basic (₹4.5L), your gratuity is calculated on ₹4.5L — not ₹15L. Companies that structure CTC with low basic components save money on both PF and gratuity at the employee’s long-term expense.

If you’re negotiating salary, push for basic to be at least 40–50% of CTC. The compounding impact on gratuity and PF over a 10–15 year career is significant.

When Gratuity Must Be Paid

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

If the employer refuses, file a claim with the Controlling Authority (the Labour Commissioner in your jurisdiction) within 90 days. The authority can order payment with penalty.

When Gratuity Can Be Forfeited

Employers can partially or fully forfeit gratuity only in specific cases:

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

Importantly: resignation, layoffs, retrenchment, and routine performance terminations do not forfeit gratuity. Many employees don’t know this — and some employers count on that.

Common Mistakes

  1. Resigning at 4 years 11 months. Even a single day under 5 years and many employers deny gratuity entirely. Check your company’s policy before submitting your notice.
  2. Thinking gratuity is based on CTC. It’s calculated on basic salary — typically 30–50% of CTC. The actual payout is smaller than most online calculators suggest.
  3. Assuming it carries over between employers. Gratuity resets completely with each new employer. The 5-year clock starts fresh on day one of the new job.
  4. Missing the ₹20L lifetime cap. If you’ve already claimed the full exemption at a previous job, you can’t claim it again. Any subsequent gratuity above what remains of your ₹20L cap is fully taxable.

Use Our Gratuity Calculator

Our Gratuity Calculator handles the 15/26 formula, rounding rules, and the ₹20L exemption correctly. For a fuller picture, try our Compare Job Offers tool — it includes gratuity as part of total compensation, which most comparison tools ignore entirely.