Gratuity Calculation India: Formula, Examples, and Tax Limit

Gratuity calculation in India follows a fixed formula under the Payment of Gratuity Act, 1972: (15 × your last drawn basic salary + DA × completed years of service) ÷ 26. You become eligible only after 5 years of continuous service with the same employer, except in cases of death or disability, where the 5-year rule doesn't apply. The amount you receive is tax-exempt up to a ceiling of ₹20 lakh — anything beyond that is taxed as salary income. This article walks through the exact gratuity calculation india formula with worked examples at different salary and tenure levels, including what happens once the amount crosses the tax-exempt ceiling, and what changes if your employer isn't covered under the Act at all.

Are you even eligible? The 5-year rule and its one exception

Under the Payment of Gratuity Act, 1972, you need 5 years of continuous service with the same employer to be eligible for gratuity on resignation or retirement. "Continuous service" generally means uninterrupted employment, though certain permitted absences (approved leave, medical leave within limits) don't break continuity. The one clear exception: if you die or become permanently disabled while employed, gratuity becomes payable to you or your nominee regardless of how long you've served — even if it's just one year. If you leave before completing 5 years for any other reason, you generally forfeit gratuity entirely under the Act — there's no partial or pro-rated payout for, say, 4 years and 8 months of service.

The formula, explained line by line

For employees covered under the Act, the formula is:

Gratuity = (15 × Last drawn salary × Completed years of service) ÷ 26

• Last drawn salary means basic salary plus dearness allowance (DA) only — not HRA, special allowance, bonus, or any other component.
• 15/26 represents 15 days' wages for every year of service, calculated on a 26-day working month (Sundays excluded), which is the standard convention under the Act.
• Completed years of service is rounded: if the period in your final year of service exceeds 6 months, it's rounded up to the next full year; if it's 6 months or less, it's rounded down. So 7 years and 7 months counts as 8 years; 7 years and 4 months counts as 7 years.

Worked example: ₹40,000 basic, 7 years of service

An employee with a last-drawn basic + DA of ₹40,000 a month, having completed exactly 7 years of continuous service:

Step	Calculation	Amount (₹)
15 × last drawn salary	15 × 40,000	6,00,000
× years of service	6,00,000 × 7	42,00,000
÷ 26	42,00,000 ÷ 26	1,61,538

Gratuity payable: ₹1,61,538. Since this is well under the ₹20 lakh exemption ceiling, the entire amount is tax-free.

Worked example: ₹1,50,000 basic, 20 years of service — approaching the ceiling

Step	Calculation	Amount (₹)
15 × last drawn salary	15 × 1,50,000	22,50,000
× years of service	22,50,000 × 20	4,50,00,000
÷ 26	4,50,00,000 ÷ 26	17,30,769

Gratuity payable: ₹17,30,769 — still below the ₹20 lakh exemption ceiling, so it remains fully tax-free. Push either the salary or the tenure a bit higher, though, and the ceiling starts to matter.

What happens above the ₹20 lakh ceiling

Take an employee with ₹2,00,000 basic + DA and 25 years of service: 15 × 2,00,000 = 30,00,000; × 25 = 7,50,00,000; ÷ 26 = ₹28,84,615. The exemption is the least of three figures: the actual gratuity received (₹28,84,615), the amount calculated by the formula (same, ₹28,84,615), or the statutory ceiling of ₹20,00,000. Here, the ceiling is the binding limit — so ₹20,00,000 is exempt, and the remaining ₹8,84,615 is added to your taxable income for that year under "profits in lieu of salary" and taxed at your applicable slab rate. This is why very senior employees with long tenure sometimes get a real tax bill on their gratuity, even though most people never cross the ceiling in practice.

If your employer isn't covered under the Payment of Gratuity Act

The Act applies to establishments with 10 or more employees on any day in the preceding 12 months — but if your specific employer somehow isn't covered, or you're not eligible under the Act's terms, a different formula and a lower tax-exemption ceiling apply:

	Covered under the Act	Not covered under the Act
Formula	15 × last drawn salary × years ÷ 26	½ × average salary of last 10 months × years of service
Salary definition	Basic + DA	Basic + DA (average of last 10 months)
Tax exemption ceiling	₹20,00,000	₹10,00,000

Government employees are fully exempt from tax on gratuity regardless of amount — this article is written for private-sector employees, who make up the vast majority of readers here.

Gratuity vs provident fund: don't confuse the two

Both are retirement-linked benefits, but they work completely differently, and mixing them up leads to bad financial planning:

	Gratuity	Provident Fund (EPF)
Who contributes	Employer only (no employee deduction)	Both employee and employer, 12% each of basic
When you get it	Only on exit, after 5 years of service	Accumulates monthly, withdrawable on job change or retirement, partial withdrawal allowed for specific reasons
Tax on withdrawal	Exempt up to ₹20 lakh	Fully exempt if withdrawn after 5 years of continuous service
Shows on monthly payslip	No — provisioned in CTC only	Yes — employee's 12% deduction appears every month

Gratuity is a bonus you get for staying long enough; PF is a forced savings account you're already building every single month, regardless of how long you eventually stay.

How gratuity is actually paid out, and the timeline

Gratuity doesn't arrive automatically the day you resign. You (or your nominee, in case of death) need to apply in writing — typically Form I under the Act — to your employer within 30 days of it becoming payable, though employers generally still process it even if you're a bit late. The employer is then required to determine the amount and pay it within 30 days of it becoming due; if they delay beyond that, they're liable to pay simple interest on the amount for the period of delay. In practice, many companies bundle gratuity into your final settlement along with leave encashment and any pending dues, which is one reason it can take longer than the statutory 30 days if your handover or full-and-final process itself is delayed. If you haven't received your gratuity well past this window, follow up in writing and reference the Act explicitly — most delays are administrative, not a genuine dispute over eligibility.

When you don't get gratuity at all

• Resignation before 5 years — no gratuity, with no partial payout, unless death or disability applies.
• Termination for proven misconduct involving moral turpitude, riotous behaviour, or violence — the Act allows full or partial forfeiture in these specific, serious cases; it doesn't apply to ordinary performance-based termination.
• Contract or gig work without an employer-employee relationship — gratuity applies to employees, not independent contractors or consultants, regardless of tenure.

Before you plan around a gratuity number, check what your last-drawn basic + DA actually is — not your full CTC — since gratuity is calculated only on that narrower figure. See how CTC differs from in-hand salary for how basic salary sits inside your broader package, and if you're timing a resignation around hitting the 5-year mark, understand how your notice period and last working date interact with your service completion date, since gratuity eligibility is calculated up to your actual last working day, not your resignation date. You can check how your basic salary and gratuity provision fit into your overall take-home using the in-hand salary calculator.

Gratuity rules, the tax-exemption ceiling, and the definition of "continuous service" have all been amended by Parliament and clarified by courts over time. The figures in this article reflect the current ₹20 lakh ceiling and the standard Payment of Gratuity Act formula; verify against current Income Tax Department and Ministry of Labour guidance before making a financial decision based on an expected gratuity payout. This is general information, not personalised tax or legal advice.

Frequently asked questions

Is gratuity calculated on CTC or basic salary?

Basic salary plus dearness allowance only — never on full CTC, and never including HRA, special allowance, or bonus.

What if I resign at exactly 4 years and 11 months?

You generally don't qualify — the Act requires 5 years of completed continuous service, and some interpretations (via specific court rulings) have allowed a shorter window in narrow circumstances, but you shouldn't rely on that; assume you need the full 5 years unless your employer's HR confirms otherwise in writing.

Is gratuity taxable?

Only above the ₹20 lakh exemption ceiling for private-sector employees covered under the Act (₹10 lakh if not covered). Government employees are fully tax-exempt on gratuity.

Can my employer refuse to pay gratuity if I was terminated, not resigned?

Only in specific cases involving proven misconduct of a serious nature as defined under the Act. Ordinary performance-based or "without cause" termination after 5 years of service does not remove your gratuity entitlement.

Does gratuity show up in my monthly salary calculations?

No. It's provisioned inside CTC on paper but paid only as a lump sum on exit after 5 years — it never appears in your monthly payslip or in-hand salary.

How is gratuity calculated if I worked part of a year beyond 5 full years?

Any additional period beyond 6 months in the final year rounds up to a full year; 6 months or less rounds down. So 6 years and 7 months of service is treated as 7 years for the formula.