Gratuity in India: Eligibility, Formula and a Worked Example
How the 15/26 gratuity formula works, who is eligible, how service years are counted, and what the calculator does and does not check.
Gratuity is the lump sum an employer pays when you leave after long service. It is easy to ignore until the day you resign, and then people are often surprised that the amount is smaller or larger than they guessed. This post walks through the formula, the eligibility rules, the way service is counted, and three worked examples you can reproduce with our gratuity calculator. It is general information, not tax or legal advice.
The formula for employees covered by the Act
For employers covered by the Payment of Gratuity Act, 1972, the standard formula is:
Gratuity = last drawn monthly salary × 15 × completed years of service ÷ 26
Three details matter here:
- "Salary" is not your CTC. It means basic pay plus dearness allowance (DA), if your employer pays DA. HRA, special allowance, bonuses and reimbursements are generally left out. This is why a person with a high CTC but a small basic component gets a smaller gratuity than expected.
- 15 days of salary per year. The 15 is the number of days of wages credited for each year of service.
- 26 days, not 30. The month is treated as having 26 working days, which is why the result is higher than a simple 15/30 calculation would give.
Eligibility: the five-year rule and its exceptions
Gratuity is normally payable once you have completed at least five years of continuous service with the employer. It becomes payable on retirement, resignation, superannuation, or on death or disablement. In the case of death or disablement the five-year condition does not apply.
India's labour codes have been changing how some of these conditions work, including for fixed-term employees. Because the rules and their effective dates have been moving, check your appointment letter and ask your HR team which rules apply to you rather than relying on a general article, ours included.
How service years are counted
Under the Act, a part of a year of more than six months is typically counted as a full year. So 7 years and 8 months of service is treated as 8 years, while 7 years and 4 months stays at 7. Our tool does not do this. It takes the whole number of years you enter and rounds down, so entering 7.9 gives the same result as entering 7. If you have a part-year above six months, round the years up yourself before entering the figure.
Worked examples
All figures below use the calculator's formula, rounded to the nearest rupee.
Example 1: ten years, basic Rs. 50,000
50,000 × 15 × 10 ÷ 26 = Rs. 2,88,462. This is also the calculator's default example.
Example 2: part-year above six months
Take last basic plus DA of Rs. 80,000 and 7 years 8 months of service. Counting by the Act's rounding, that is 8 years:
- With 8 years: 80,000 × 15 × 8 ÷ 26 = Rs. 3,69,231
- With 7 years (what the tool uses if you type 7.67): 80,000 × 15 × 7 ÷ 26 = Rs. 3,23,077
The difference is Rs. 46,154 for the same person. Enter 8 in the tool if the Act's rounding applies to you.
Example 3: below five years
With basic Rs. 30,000 and 4 years, the formula gives Rs. 69,231. The calculator will show that number, but in an ordinary resignation case it is not payable, because the five-year condition is not met. The tool does not check eligibility.
| Last salary (basic + DA) | Years | Gratuity |
|---|---|---|
| Rs. 50,000 | 10 | Rs. 2,88,462 |
| Rs. 80,000 | 7 | Rs. 3,23,077 |
| Rs. 80,000 | 8 | Rs. 3,69,231 |
| Rs. 30,000 | 4 | Rs. 69,231 (not normally payable) |
If your employer is not covered by the Act
Some establishments fall outside the Act. For them the usual convention is 15 days of salary over 30 days in a month, instead of 26. With Rs. 80,000 salary and 7 years, that gives 80,000 × 15 × 7 ÷ 30 = Rs. 2,80,000, compared with Rs. 3,23,077 under the 26-day formula. Our calculator uses only the 26-day formula, so it will overstate the figure for such employers. Your employment contract should say which applies.
Tax on gratuity
For retirement, resignation, death or disablement, the tax exemption on gratuity under section 10(10) of the Income Tax Act is capped at Rs. 20 lakh (the limit has stood at this level since the 2018 and 2019 notifications). The exemption is the least of the actual amount received, the formula amount, and the cap. Any excess over the exemption is added to your taxable income. If you are in the middle of a job change, the amount you receive is separate from your regular pay, so treat it as its own line when you plan your tax; our income tax calculator can show how an extra amount of taxable income changes your liability under the new regime. Confirm the current limit on the Income Tax Department's website before you rely on it.
Using gratuity when comparing job offers
Gratuity is usually part of your CTC but not part of your monthly take-home. When an offer lists a CTC, ask what the basic salary is, because a higher basic raises PF and gratuity while lowering in-hand pay. The CTC to take-home calculator models a standard 40% basic structure and builds employer-side items like PF and gratuity into the estimate, so you can see why the monthly figure is far below CTC divided by 12. It is an estimate under a fixed structure, not your actual payslip.
A simple decision framework for a job change:
- Note your completed years and any part-year above six months.
- Check whether you will cross the five-year mark if you stay a few extra months. Leaving at 4 years 10 months can mean losing the whole amount.
- Compute the figure with both the rounded-down and rounded-up year count, to see the stake.
- Ask HR for the exact basic plus DA that they will use as "last drawn salary".
What the calculator does not cover
- It does not check the five-year condition, death or disablement exceptions, or any other eligibility rule.
- It does not apply the Act's statutory ceiling on the amount or the tax exemption limit.
- It floors years instead of rounding up part-years above six months.
- It uses only the 26-day formula and has no option for employers outside the Act.
- It uses the salary you type. It cannot know which components your employer counts as basic plus DA.
- It does not model the new labour codes or any employer-specific, more generous gratuity policy.
Treat the output as a planning estimate and confirm the final figure with your employer's HR or payroll team. This post is general information and does not replace advice from a qualified tax or legal professional.