How Gratuity Is Calculated
Gratuity is a lump-sum reward for long service, paid when you resign, retire or are terminated after at least 5 years of continuous service. For employees covered under the Payment of Gratuity Act 1972, the formula is:
Gratuity = (15 × Last drawn Basic+DA × Years of service) ÷ 26
The 26 represents working days in a month, and 15 represents 15 days' wages for each completed year. A period of more than six months counts as a full year — so 10 years 7 months is treated as 11 years.
If Your Employer Is Not Covered Under the Act
Gratuity = (15 × Average Basic+DA × Years of service) ÷ 30
Here the month is treated as 30 days and part-years are not rounded up.
Eligibility
- Minimum 5 years of continuous service with the same employer.
- The 5-year rule is waived in case of death or disablement due to accident or disease.
- Covered employers: factories, mines, companies and shops employing 10 or more people.
Tax on Gratuity
For non-government employees, gratuity is tax-free up to ₹20 lakh (lifetime limit across employers). Any amount above ₹20 lakh is added to your income and taxed at your slab rate. Government employees receive gratuity fully tax-free.