Gratuity Calculator India 2026 - Formula, Eligibility & Tax Exemption Guide
TL;DR
Gratuity is a lump-sum retirement benefit paid by employers to employees who have completed 5 or more years of continuous service. The formula is: Last drawn salary x 15 x Years of service / 26. The maximum tax-free gratuity is Rs 20,00,000 for government employees and employees covered under the Payment of Gratuity Act. For a Rs 50,000 last drawn salary after 10 years of service, gratuity works out to Rs 2,88,462. Key Facts:
- Eligibility: Minimum 5 years of continuous service
- Formula: (Last Salary x 15 x Years of Service) / 26
- Tax-free limit: Rs 20,00,000 (raised from Rs 10L in 2019)
- "Last drawn salary" = Basic + DA (Dearness Allowance)
- Applicable to organizations with 10+ employees
- Paid at resignation, retirement, superannuation, or death/disability
Gratuity Calculation Formula
For Employees Covered Under the Gratuity Act
Gratuity = (Last Drawn Salary x 15 x Years of Service) / 26
Where:
- Last Drawn Salary = Basic Salary + Dearness Allowance
- 15 = 15 days' wages for each year
- 26 = Working days in a month (excluding 4 Sundays)
- Years of Service = Completed years (6 months+ rounded up)
For Employees NOT Covered Under the Gratuity Act
Gratuity = (Last Drawn Salary x 15 x Years of Service) / 30
The divisor is 30 (calendar days) instead of 26 for employees not covered under the Act.
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Gratuity Calculation Examples
| Last Drawn Salary (Basic + DA) | Years of Service | Gratuity (Act covered) | Gratuity (Not covered) |
|---|---|---|---|
| Rs 25,000 | 5 years | Rs 72,115 | Rs 62,500 |
| Rs 25,000 | 10 years | Rs 1,44,231 | Rs 1,25,000 |
| Rs 40,000 | 10 years | Rs 2,30,769 | Rs 2,00,000 |
| Rs 50,000 | 15 years | Rs 4,32,692 | Rs 3,75,000 |
| Rs 75,000 | 20 years | Rs 8,65,385 | Rs 7,50,000 |
| Rs 1,00,000 | 25 years | Rs 14,42,308 | Rs 12,50,000 |
| Rs 1,00,000 | 30 years | Rs 17,30,769 | Rs 15,00,000 |
Detailed Example: Rs 50,000 Basic + DA, 10 Years Service
Gratuity = (50,000 x 15 x 10) / 26
= 75,00,000 / 26
= Rs 2,88,462
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Eligibility Rules
The Payment of Gratuity Act, 1972 specifies these conditions:
| Condition | Requirement |
|---|---|
| Minimum service | 5 years of continuous service |
| Organization size | 10 or more employees |
| Coverage | All employees (including contract workers in eligible organizations) |
| Rounding rule | Service of 6 months or more in the last year is rounded up |
| Death/disability | 5-year rule is waived; gratuity payable from day one |
| Retirement/superannuation | Normal eligibility at 58/60 years |
Important: The 4 Years 240 Days Rule
Several High Court rulings have established that if an employee has completed 4 years and 240 days of service (190 days for seasonal workers), it should be rounded up to 5 years, making them eligible for gratuity. However, this interpretation varies by jurisdiction.
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Tax Treatment of Gratuity
Government Employees
Gratuity received by central/state government employees and defence personnel is fully exempt from income tax, with no upper limit.
Private Sector Employees (Covered Under Gratuity Act)
The least of the following three amounts is tax-exempt:
- Actual gratuity received
- Rs 20,00,000 (statutory limit)
- 15 days' salary for each completed year of service (using 26-day month)
Private Sector Employees (NOT Covered Under Gratuity Act)
The least of the following is exempt:
- Actual gratuity received
- Rs 20,00,000
- Half month's average salary for each completed year of service (average of last 10 months)
| Employee Type | Tax-Free Limit | Excess Treatment |
|---|---|---|
| Government employee | No limit | Fully tax-free |
| Private (Act covered) | Rs 20,00,000 | Taxed at slab rate |
| Private (Not covered) | Rs 20,00,000 | Taxed at slab rate |
When Can Gratuity Be Forfeited?
Under the Payment of Gratuity Act, an employer can forfeit gratuity (fully or partially) only in specific situations:
- Termination for misconduct: If an employee is terminated for riotous or violent behavior, or for an act that constitutes a criminal offence involving moral turpitude
- Damage to employer property: Gratuity can be forfeited to the extent of the damage caused
- Poor performance
- Not serving notice period (deduction from final settlement is separate)
- Policy violations that don't involve moral turpitude
Gratuity vs Other Retirement Benefits
| Benefit | Source | Eligibility | Tax Treatment |
|---|---|---|---|
| Gratuity | Employer-funded | 5 years service | Exempt up to Rs 20L |
| EPF | Employee + Employer | From day one | EEE (after 5 years) |
| Pension (EPS) | Employer (via EPFO) | 10 years service | Partially taxable |
| Leave Encashment | Employer | On retirement/resignation | Exempt up to Rs 25L (govt) |
| NPS | Employee + Employer | Voluntary | EET |
Frequently Asked Questions
Q: Is gratuity part of CTC in India?
Yes, most companies include gratuity as part of CTC (Cost to Company). It is typically calculated as 4.81% of basic salary (which equals 15/26 x 12 months x basic / 12). However, gratuity is only paid out when you leave the organization after completing 5 years.
Q: Can I get gratuity if I resign before 5 years?
No, if you resign before completing 5 years of continuous service, you are not entitled to gratuity under the Payment of Gratuity Act. Some companies may voluntarily pay a pro-rated amount, but there is no legal obligation. The exception is death or disability, where gratuity is payable regardless of service length.
Q: How is gratuity calculated for service of 7 years and 8 months?
Since the fractional year (8 months) exceeds 6 months, it is rounded up to 8 years. Gratuity is calculated for 8 completed years of service. For example, with Rs 40,000 last drawn salary: (40,000 x 15 x 8) / 26 = Rs 1,84,615.
Q: Is gratuity paid monthly or as lump sum?
Gratuity is always paid as a lump sum at the time of separation from the employer (resignation, retirement, superannuation, or in case of death/disability). It is not a monthly benefit. The employer must pay gratuity within 30 days of it becoming payable.
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