How to Calculate Gratuity in India: Formula, Examples, Tax Treatment

Most Indian employees know that gratuity is “some money you get when you leave a job after 5 years” — but not the formula, the cap, or how it's taxed. The numbers matter: for a mid-career professional with 10 years at one company, gratuity can be ₹3-5 lakh — nontrivial. This guide walks through the entire calculation, from eligibility to tax treatment to edge cases.

What is gratuity?

Gratuity is a lump-sum payment from employer to employee, paid out at the end of long service — on resignation, retirement, death, or permanent disablement. It's governed by the Payment of Gratuity Act, 1972 for organisations with 10 or more employees, and by company policy for smaller employers.

Think of it as a deferred compensation: a small portion of your salary every year, paid in one shot when you leave. The employer accrues this liability quietly across your tenure (usually as ~4.81% of basic per month) and pays it out at exit.

Eligibility: the 5-year rule

You're eligible for gratuity after 5 years of continuous service with the same employer. The 5-year rule is waived in only two cases: death (legal heirs receive it regardless of tenure) and permanent disablement (employee receives it regardless of tenure).

Notable: the Supreme Court ruled in 2018 that 4 years 240 dayscounts as 5 years for gratuity purposes — i.e. you need 4 full years and 240 days in the 5th year. So if you're leaving at 4 years 8 months and the employer says “sorry, you're not eligible”, push back. (Conditions vary by industry — manufacturing uses 4 years 190 days for daily-wage roles.)

The two formulas

The formula depends on whether your employer is covered under the Gratuity Act:

Formula 1: Covered employer (≥10 employees)

Gratuity = (Last drawn Basic + DA) × 15/26 × Years of service

The 15/26represents 15 days' salary per year of service, with 26 working days assumed per month (excluding Sundays).

Years of service rounding: if your final-year tenure is 6 months or more, it rounds up to a full year. So 7 years 7 months counts as 8 years; 7 years 5 months counts as 7.

Formula 2: Non-covered employer

Gratuity = (Last drawn Basic + DA) × 15/30 × Years of service

For employers not covered under the Act (typically small businesses with <10 employees), the calculation uses 30 calendar days instead of 26. Result is slightly lower for the same salary and tenure.

Years of service rounding: only fully completed years count. No rounding up regardless of additional months.

Worked example: covered employer

Take an employee with last drawn Basic + DA of ₹50,000/month and 9 years 8 months of service at a covered employer.

• Effective years = 10 (8 months → rounded up since ≥6)
• Gratuity = ₹50,000 × 15/26 × 10
• = ₹50,000 × 0.5769 × 10
• = ₹2,88,461

Use our Gratuity Calculator to plug in your own numbers.

Worked example: non-covered employer

Same employee at a non-covered employer with 9 years 8 months:

• Effective years = 9 (only completed years; 8 months extra ignored)
• Gratuity = ₹50,000 × 15/30 × 9
• = ₹50,000 × 0.5 × 9
• = ₹2,25,000

₹63,461 less for the same salary and same time at desk. The Act's coverage threshold (10 employees) is one of the most consequential numbers in Indian employment law.

The ₹20 lakh statutory cap

Section 4(3) of the Payment of Gratuity Act caps the maximum tax-exempt gratuity at ₹20 lakh, revised in 2018 from the previous ₹10 lakh limit. This applies to:

• The maximum amount the Act requires the employer to pay (employer can voluntarily pay more, but the excess is taxable as salary).
• The maximum that's tax-exempt for the employee under Section 10(10).

For high-earners (e.g. CXOs with last salary ≥₹3.5 lakh/month), the formula often produces gratuity above ₹20 lakh. The capped amount is paid; the rest, if paid voluntarily by the employer, is taxable.

Tax treatment

• Government employees: entire gratuity received is fully exempt from tax. No cap applies.
• Private employees, employer covered under the Act: exempt up to the LEAST of (a) ₹20 lakh, (b) actual gratuity received, (c) 15/26 × salary × years. The excess is taxable as salary.
• Private employees, employer NOT covered: exempt up to the LEAST of (a) ₹20 lakh, (b) actual gratuity received, (c) 15/30 × salary × years × 1/2 (note the additional ½ multiplier for this category). The excess is taxable.

The ₹20 lakh exemption is a lifetime cap, not per-job. If you received ₹15 lakh tax-exempt gratuity at Job A and now leave Job B with ₹10 lakh, only ₹5 lakh of Job B's gratuity is exempt — the rest is taxable.

What happens when you change jobs before 5 years?

Strictly speaking, you forfeit the gratuity. There's no “portability” for gratuity unlike PF (which has UAN). Each job's gratuity clock resets to zero on Day 1 of the new job.

The exception: if your previous employer is acquired or merged, your service continues with the new entity for gratuity purposes. Negotiate this explicitly during the deal — it's in the standard merger documentation but employees often miss it.

Frequently asked

Does HRA / bonus / variable pay count toward gratuity? No. Only Basic + DA goes into the formula. This is one reason structuring salary with high HRA / variable / allowances reduces your gratuity (and PF, and pension). Worth tracking when you negotiate.

What if my employer refuses to pay? File a complaint with the Controlling Authority under the Gratuity Act (typically the Labour Commissioner of your state). Gratuity is a statutory entitlement, not a discretionary bonus. The employer must pay within 30 days of becoming due, with 6% interest if delayed.

Is gratuity included in CTC?Often yes — most CTC structures include a “gratuity provision” line item (~4.81% of basic). It's a real cost to the employer (they accrue this monthly), but you only see the lump sum at exit. Treat it like an emergency-fund addition rather than current income.

Use our Gratuity Calculator to plug in your specific numbers and see your eligible payout. For tax planning around large gratuity payouts, our Income Tax Calculator helps you decide which regime minimises your overall tax in your exit year.