Gratuity Calculation in India: Formula, Eligibility, and Tax

What Is Gratuity?

Gratuity is a retirement benefit paid by employers to employees who have completed 5 or more years of continuous service. It is governed by the Payment of Gratuity Act, 1972.

Eligibility for Gratuity

You are eligible for gratuity when: You resign after completing 5+ years with the same employer. You retire. You pass away or become disabled (5-year rule waived).

For death or disability, gratuity is paid even if 5 years are not completed.

Gratuity Calculation Formula

For employees covered under the Gratuity Act:

Gratuity = (Last drawn salary × 15 × Number of years worked) ÷ 26

Last drawn salary = Basic salary + Dearness Allowance

15 = 15 days wages per year of service

26 = Working days per month

Example:

Basic salary: Rs 50,000/month

Years of service: 8 years 7 months (rounded to 9 years — if 6+ months, round up)

Gratuity = (50,000 × 15 × 9) ÷ 26 = 67,50,000 ÷ 26 = Rs 2,59,615

Rounding Service Period

Less than 6 months of the last year: Round down (8 years 4 months = 8 years)

6 months or more of the last year: Round up (8 years 7 months = 9 years)

Maximum Gratuity Amount

The maximum tax-exempt gratuity under the Gratuity Act is Rs 20 lakh. Any gratuity above this amount is taxable.

For government employees, the maximum is Rs 25 lakh.

Gratuity Tax Rules

Government employees: Fully exempt from income tax.

Private sector employees covered by Gratuity Act: Exempt up to Rs 20 lakh. Amount above Rs 20 lakh is taxable.

Private sector employees not covered by Act: Exempt up to Rs 20 lakh. Formula differs slightly.

Frequently asked questions

Is gratuity paid on resignation?

Yes, gratuity is paid on resignation after completing 5 years of continuous service with the same employer.

What if I resign before 5 years?

You are not entitled to gratuity if you resign before completing 5 years of continuous service (except in cases of death or disability, where the 5-year rule is waived).