Gratuity calculation formula
For employers covered under the Act (any establishment with 10 or more employees), gratuity is calculated as 15 days of salary for every completed year of service. A month is taken as 26 working days, which gives the well-known 15/26 formula.
Gratuity = (15 × Last drawn salary × Years of service) ÷ 26 Last drawn salary = Basic pay + Dearness allowance
- Years of service are rounded: 10 years and 7 months counts as 11 years; 10 years and 5 months counts as 10 years.
- Only basic salary and DA are included. HRA, bonus, overtime and other allowances are not.
- For employers not covered under the Act, the divisor is 30 instead of 26 and only completed years are counted.
Example: With a last drawn Basic + DA of ₹50,000 per month and 10 years 7 months of service, the service period rounds to 11 years and the gratuity is (15 × 50,000 × 11) ÷ 26 = ₹3,17,308.
Who is eligible for gratuity?
- You must have completed 5 years of continuous service with the same employer. Many courts treat 4 years and 240 days as 5 years.
- The 5-year rule does not apply in case of death or disablement; gratuity is paid to the employee or nominee regardless of service length.
- It applies to employees in factories, mines, shops, companies and other establishments with 10 or more workers.
- Contract and fixed-term employees are also covered if they meet the service condition.
Tax on gratuity
- Government employees: gratuity is fully tax free.
- Private employees covered under the Act: tax free up to ₹20 lakh (lifetime limit across all employers). The lowest of actual gratuity, ₹20 lakh and the 15/26 formula amount is exempt.
- Anything above the exempt amount is added to your salary income and taxed at your slab rate.
- Gratuity received by a nominee on the death of the employee is fully exempt.
When is gratuity paid?
The employer must pay gratuity within 30 days of it becoming due, which is the date you leave, retire or resign. If payment is delayed, the employer has to pay interest. You can claim gratuity even if you resign, as long as you have completed 5 years.
Frequently asked questions
Is gratuity paid on resignation?
Yes. Gratuity is payable on resignation, retirement, retrenchment or termination, provided you have completed 5 years of continuous service.
Is 4 years 8 months eligible for gratuity?
Under the Madras High Court ruling, 4 years and 240 days in the fifth year is treated as 5 years. Many employers follow this, but some insist on a full 5 years, so check your company policy.
What is the maximum gratuity amount?
There is no legal cap on what an employer may pay, but the tax free limit is ₹20 lakh for private employees and gratuity above that is taxable.
Is gratuity deducted from my salary?
No. Gratuity is paid entirely by the employer. Some companies show a notional gratuity component in the CTC, but nothing is deducted from your take-home pay.
Does the calculator work for employees not covered under the Act?
Yes. Select the "No" option and the calculator uses the 15/30 formula with completed years only, which is what the Income Tax Act prescribes for such cases.
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