How Gratuity Is Calculated: Formula, Examples and Tax
Gratuity is calculated as last drawn basic + DA × 15 ÷ 26 × years of service if your employer is covered by the Payment of Gratuity Act. So ₹50,000 of basic + DA and 11 years of service gives ₹3,17,308. You normally need 5 years of continuous service, and up to ₹20 lakh is tax-free for private employees.
The gratuity formula
Gratuity is a lump sum your employer pays when you leave after long service. In India it is governed by the Payment of Gratuity Act, 1972 and, going forward, by the Code on Social Security, 2020. There are two formulas, depending on whether your employer is covered by the Act.
Employer covered by the Gratuity Act
Any shop or establishment that has had 10 or more employees on any day in the last 12 months is covered, and stays covered even if headcount later falls. Most companies, banks, hospitals and schools fall here.
Gratuity = Last drawn monthly (basic + DA) × 15 ÷ 26 × years of service
- 15 is 15 days of wages for every completed year.
- 26 is the number of working days the Act assumes in a month (4 Sundays excluded).
- Years of service: a final part-year of more than 6 months is rounded up to a full year; 6 months or less is dropped. 10 years 7 months counts as 11 years; 10 years 6 months counts as 10.
- Salary means basic pay plus dearness allowance (and commission if it is a fixed percentage of turnover). HRA, bonus, overtime and other allowances are not included.
Because 15 ÷ 26 is about 57.69%, a quick mental shortcut is: each year of service earns a little more than half a month of basic + DA.
Employer not covered by the Act
Smaller employers are not legally required to pay gratuity, but many do so voluntarily under their own policy. When they do, the income tax rules use this formula to decide the tax-free part:
Gratuity = Average monthly salary of the last 10 months × 15 ÷ 30 × completed years of service
Here a month is taken as 30 days and only completed years count; there is no rounding up of the final part-year.
Try it: Enter your basic + DA and joining and leaving dates in the Gratuity Calculator
Who is eligible and when
- Five years of continuous service is the normal requirement for resignation or retirement.
- No minimum applies on death or disablement due to accident or disease; gratuity is paid to the nominee or legal heir.
- The 4 years 240 days question: several High Court rulings have treated 4 years plus 240 working days in the fifth year (190 days for establishments working 5 days a week, under Section 2A of the Act) as five years of continuous service. Employers do not all follow this, so check your HR policy and be ready to cite the rule if needed.
- Fixed-term employees: the Code on Social Security, 2020, which the government brought into force in November 2025, makes fixed-term employees eligible after one year of service on a pro-rata basis. Check the latest rules notified by your state for how this applies to you.
Gratuity must be paid within 30 days of it becoming payable. If the employer delays, simple interest is due on the amount. Gratuity can be forfeited only in narrow cases, such as termination for proven misconduct that caused loss to the employer, and then only to the extent of that loss (or fully for riotous or violent conduct or offences involving moral turpitude).
Worked examples
Example 1: Meera, covered employer, 10 years 7 months
Meera’s last drawn basic + DA is ₹50,000 a month. Her service of 10 years 7 months rounds up to 11 years because the extra part is more than 6 months.
₹50,000 × 15 ÷ 26 × 11 = ₹3,17,308.
Had she left one month earlier, at 10 years 6 months, she would have been paid for 10 years: ₹2,88,462. That ₹28,846 difference is why it is worth checking your exact dates before handing in your resignation.
Example 2: Arjun, employer not covered, 8 years 11 months
Arjun’s average basic + DA over his last 10 months is ₹40,000. Only completed years count, so his 8 years 11 months is treated as 8 years.
₹40,000 × 15 ÷ 30 × 8 = ₹1,60,000.
Example 3: Ramesh, 25 years and a high salary
Ramesh retires from a private company after exactly 25 years with basic + DA of ₹1,50,000 a month. The formula gives ₹1,50,000 × 15 ÷ 26 × 25 = ₹21,63,462. The maximum payable under the Gratuity Act and the maximum tax exemption for private employees are both ₹20 lakh, so unless his employer pays more voluntarily he receives ₹20 lakh. If the employer does pay the full ₹21,63,462, the ₹1,63,462 above the limit is taxed as salary at his slab rate.
Example 4: exactly five years
With basic + DA of ₹35,000 and exactly 5 years of service: ₹35,000 × 15 ÷ 26 × 5 = ₹1,00,962.
Quick reference table
Gratuity at a covered employer for common salaries and service lengths (basic + DA per month):
| Basic + DA | 5 years | 10 years | 20 years |
|---|---|---|---|
| ₹25,000 | ₹72,115 | ₹1,44,231 | ₹2,88,462 |
| ₹50,000 | ₹1,44,231 | ₹2,88,462 | ₹5,76,923 |
| ₹75,000 | ₹2,16,346 | ₹4,32,692 | ₹8,65,385 |
| ₹1,00,000 | ₹2,88,462 | ₹5,76,923 | ₹11,53,846 |
Values computed with the 15/26 formula and rounded to the nearest rupee. At ₹1,00,000 basic + DA, the ₹20 lakh cap is reached after about 34.7 years.
How gratuity is taxed
Gratuity is exempt under Section 10(10) of the Income Tax Act, within limits:
| Who you are | Tax-free amount |
|---|---|
| Central/state government employee | Fully exempt |
| Private employee, employer covered by the Act | Least of: actual gratuity received; 15/26 formula amount; ₹20,00,000 |
| Private employee, employer not covered | Least of: actual gratuity received; 15/30 formula on 10-month average; ₹20,00,000 |
Anything above the exempt amount is added to your salary income and taxed at your slab rate in the year you receive it. The ₹20 lakh limit is a lifetime limit across all employers: if you have already claimed exemption on an earlier gratuity, that amount is reduced from the ₹20 lakh. Gratuity paid to a nominee after an employee’s death is not taxable as salary in the nominee’s hands.
The exemption works the same way in the old and new tax regimes, so your choice of regime does not change how gratuity is taxed. If part of it is taxable and it relates to many years of service, you can claim relief under Section 89 by filing Form 10E. See our new vs old tax regime guide for how the rest of your salary is taxed. The current rules are on the Income Tax Department portal.
Gratuity in your CTC
Many companies show gratuity as part of cost to company, usually as 4.81% of basic pay (which is 15 ÷ 26 ÷ 12). This is a provision, not money you receive each month, and you get it only if you complete the qualifying service. If you leave after three years, that component of your CTC was never paid. This is one reason in-hand pay is always lower than CTC; our CTC vs in-hand salary guide breaks the rest down.
Try it: See what reaches your bank account each month with the Salary Calculator
Practical tips before you resign
- Count your months. At a covered employer, staying past the 6-month mark of a part-year adds a full year of gratuity, as Example 1 shows.
- Check your nomination in Form F with HR, so your family can claim without delay.
- Know what “salary” means in your payslip. Only basic + DA count, so a structure with low basic gives low gratuity. The labour codes push basic + DA towards 50% of total pay, which can raise gratuity.
- Apply in writing (Form I) if the employer does not process it automatically, and keep a copy.
- Delays and disputes go to the Controlling Authority under the Act, usually the Assistant Labour Commissioner for your area.
Try it: Planning your exit? Estimate the payout in seconds with the Gratuity Calculator
Frequently asked questions
What is the formula for gratuity?
For employers covered by the Payment of Gratuity Act: last drawn basic + DA x 15 / 26 x years of service, with a part-year above 6 months rounded up. For employers not covered: average basic + DA of the last 10 months x 15 / 30 x completed years.
How much gratuity will I get for 5 years with a basic of 35,000?
At a covered employer, ₹35,000 x 15 / 26 x 5 = ₹1,00,962. Add DA to the basic if your salary includes it.
Is gratuity payable for 4 years 7 months?
Under the Act, the normal requirement is 5 years of continuous service. Some High Court rulings accept 4 years plus 240 working days in the fifth year as continuous service, so 4 years 7 months may qualify, but employers do not all apply this. The 5-year condition does not apply on death or disablement.
Is gratuity taxable?
Government employees get it fully tax-free. For private employees, the least of the actual amount, the formula amount and ₹20 lakh is exempt under Section 10(10); any excess is taxed as salary at your slab rate.
What is the maximum gratuity limit?
The ceiling under the Payment of Gratuity Act and the tax-exemption limit for private employees is ₹20 lakh. An employer may pay more voluntarily, but the excess is taxable.
Does the 6-month rounding rule apply to everyone?
No. Rounding up a part-year above 6 months applies only to employers covered by the Gratuity Act. For employers not covered, only completed years count.
Why is gratuity shown as 4.81% of basic in my CTC?
Because 15 / 26 / 12 equals about 4.81%, which is the monthly cost of one year’s gratuity. It is a provision, not a monthly payment, and you receive it only when you leave after qualifying service.
Related guides
- CTC vs In-Hand Salary: How to Calculate Take-Home Pay
- New vs Old Tax Regime FY 2025-26: Which Saves More?
- PPF vs EPF vs NPS vs Sukanya Samriddhi Compared
- HRA Exemption & Rent Receipts: Complete Guide
This guide is general information, not legal, financial or tax advice. Rules are as of FY 2025-26; check the latest notifications or your HR policy before acting.