How to Calculate Gratuity in India (Formula + Examples)
Gratuity is a lump-sum reward your employer pays for long, continuous service, usually when you resign, retire, or are laid off. It is governed by the Payment of Gratuity Act, 1972, and once you understand the formula it is easy to estimate yourself. This guide covers who qualifies, the exact calculation, worked examples, the statutory cap, and how gratuity is taxed.
Who Is Eligible
The core rule is simple: you must complete five years of continuous service with the same employer to be eligible for gratuity. The Act applies to establishments with 10 or more employees.
There is one important exception. The five-year condition is waived if service ends due to the employee's death or disablement. In the case of death, the gratuity is paid to the nominee or legal heir regardless of how long the person worked.
The Gratuity Formula
For employees covered by the Act, gratuity is calculated as:
Gratuity = (Last drawn salary × 15 × Years of service) ÷ 26
Where:
- Last drawn salary = basic pay + dearness allowance (DA). It does not include HRA, bonuses, or other allowances.
- 15 represents 15 days of wages for each completed year of service.
- 26 is the number of working days assumed in a month (a month is treated as 26 working days, excluding Sundays).
Rounding the Years
Years of service are rounded to the nearest full year based on a six-month rule:
- 6 years and 7 months is rounded up to 7 years.
- 6 years and 4 months is rounded down to 6 years.
Worked Examples
Example 1. Priya has worked 10 years. Her last drawn basic + DA is ₹50,000.
Gratuity = (50,000 × 15 × 10) ÷ 26 = ₹2,88,461 (approximately).
Example 2. Rahul served 8 years and 8 months, so it rounds up to 9 years. His last drawn basic + DA is ₹40,000.
Gratuity = (40,000 × 15 × 9) ÷ 26 = ₹2,07,692 (approximately).
You can skip the arithmetic entirely and plug your own figures into the Gratuity Calculator to get an instant estimate.
Employees Not Covered by the Act
If your employer is not covered by the Act, gratuity is often paid voluntarily using a slightly different formula that divides by 30 instead of 26 and uses the average salary of the last 10 months:
Gratuity = (Average salary × 15 × Years) ÷ 30
Here part-years are usually not rounded up. Because the divisor is larger, the same salary and tenure produce a somewhat smaller payout than the covered formula.
The ₹20 Lakh Cap
The maximum gratuity payable under the Act is ₹20 lakh. Even if the formula produces a higher figure, the amount you can receive as statutory gratuity is capped at ₹20 lakh across your career. Employers may pay more as an ex-gratia goodwill amount, but anything above the cap loses the special tax treatment.
How Gratuity Is Taxed
The tax treatment depends on your employer type:
| Employee category | Tax treatment |
|---|---|
| Government employees | Fully exempt from tax |
| Private employees covered by the Act | Exempt up to the least of: ₹20 lakh, actual gratuity received, or the formula amount |
| Private employees not covered | Exempt up to the least of ₹20 lakh, actual gratuity, or half-month average salary × years |
Any gratuity received above the exempt limit is added to your income and taxed at your slab rate.
Quick Checklist Before You Estimate
- Confirm you have completed 5 years (unless death or disablement applies).
- Use only basic + DA as the salary figure, not your full CTC.
- Round your service using the six-month rule.
- Apply the ÷26 formula if covered by the Act, ÷30 if not.
- Remember the ₹20 lakh statutory cap.
The Takeaway
Gratuity rewards loyalty, and the maths is straightforward once you know the pieces: five years of service, basic + DA as the salary base, 15 days of pay per year, and a divisor of 26 for covered employees, all capped at ₹20 lakh. Run your exact numbers through the Gratuity Calculator so you know what to expect in your final settlement.
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