Gratuity Calculation in India: Formula, Eligibility, and Tax Rules (2026)

What is Gratuity and Who Gets It?

Gratuity is a lump-sum payment made by your employer as a token of appreciation for your long-term service. It's governed by the Payment of Gratuity Act, 1972 and is applicable to establishments with 10 or more employees.

Eligibility: You must complete 5 years of continuous service with the same employer to be eligible for gratuity. This is the single most important rule — many employees lose significant gratuity by switching jobs before the 5-year mark.

The Gratuity Formula

For Employees Covered Under the Payment of Gratuity Act:

Gratuity = (Last Drawn Basic Salary + DA) × 15 ÷ 26 × Number of Years of Service

Where:

• **15**: 15 days of salary per year of service
• **26**: Average working days per month (26 days, excluding Sundays)
• **Years of Service**: Rounded to the nearest year (6+ months = 1 year)

Worked Example

Employee details:

• Last Basic Salary: ₹80,000/month
• DA (Dearness Allowance): ₹0 (most private sector employees)
• Years of Service: 7 years and 8 months = **8 years** (8 months > 6, so rounded up)

Gratuity = ₹80,000 × 15 ÷ 26 × 8 = ₹36,923 × 8 = ₹2,95,384

The 5-Year Rule: What Counts as Continuous Service?

The 5-year clock runs from your date of joining to your date of resignation or retirement. Key points:

• **Maternity Leave**: Does NOT break continuity
• **Approved Medical Leave**: Does NOT break continuity
• **Unauthorized Absence**: Can break continuity (consult HR)
• **Fixed-Term Contract**: Each contract period counts separately (unless renewed)
• **4 years + 240 days**: Some courts have ruled that 4 years and 240 days = 5 years of continuous service. This is under legal interpretation but several High Courts have supported it.

Gratuity Maximum Limit

The maximum gratuity amount that is tax-free is:

• **Government Employees**: ₹20,00,000 (₹20 lakh)
• **Private Sector Employees (Act-covered)**: ₹20,00,000 (₹20 lakh, revised from ₹10L)
• **Private Sector (not covered by Act)**: The lesser of: half month's average salary per year, OR ₹20L

Gratuity amounts above ₹20 lakh are taxable as "Profits in lieu of salary."

Tax Treatment of Gratuity

For most salaried professionals in India (private sector), you're covered under the Act if your employer has 10+ employees. Your gratuity up to ₹20 lakh is completely tax-free.

Gratuity as Part of CTC — The Hidden Cost

Most companies include a gratuity provision in your CTC even though you can only claim it after 5 years. The calculation in CTC is:

Gratuity provision = 4.81% of Basic Salary per year

For Basic = ₹60,000/month:

Monthly gratuity provision = 4.81% × ₹60,000 = ₹2,886/month

Annual = ₹34,632

This ₹34,632 is part of your CTC but you'll only receive it after 5 years. If you leave before 5 years: you lose this entire amount — the company keeps it.

How to Claim Gratuity

1. Apply in **Form I** to your employer within 30 days of eligibility
2. Employer must pay within **30 days** of gratuity becoming payable
3. If delayed, you're entitled to interest on delayed payment
4. For disputes, approach the **Controlling Authority** under the Gratuity Act (usually a Labour Commissioner)

Gratuity Planning: Should You Stay for 5 Years?

For a professional earning ₹12 LPA with Basic = ₹50,000/month, staying the full 5 years earns:

Gratuity = ₹50,000 × 15/26 × 5 = ₹1,44,231

If you leave at 4 years: ₹0 (unless 4 years + 240 days rule applies)

If you leave at 6 years: ₹50,000 × 15/26 × 6 = ₹1,73,077

The jump from ₹0 to ₹1.44 lakh at the 5-year mark is significant enough to factor into your career decisions.

Use our Gratuity Calculator to calculate your exact gratuity entitlement based on your salary and years of service.