Why this matters: Gratuity is a statutory benefit for long-serving employees in India and often forms an important part of end-of-service pay. Knowing how gratuity is calculated, who is eligible, and the tax treatment helps employees verify payouts and plan finances after leaving service.
Eligibility — who gets gratuity?
- An employee is eligible for gratuity after completing 5 years of continuous service with the same employer (with some exceptions like death or disablement where shorter service may qualify).
- Organisations covered under the Payment of Gratuity Act, 1972 must pay gratuity as per the statutory formula. Employers not covered may follow contractual terms (see variation below).
Official formula (Payment of Gratuity Act)
For employees covered by the Act, the standard formula used is:
Gratuity = (Last drawn salary × 15 × Number of completed years of service) ÷ 26
Where:
- Last drawn salary normally means basic salary + dearness allowance (DA).
- 15 denotes 15 days' wages for each year of service.
- 26 represents 26 working days in a month (used in the actuarial practice for the Act's formula).
- Service of more than 6 months in a year is usually rounded up to the next completed year (subject to Act/organization policy).
If an employer is not covered by the Act or contract defines a different base, an alternative common formula is:
Gratuity = (Last drawn salary × 15 × Number of completed years of service) ÷ 30
This uses 30 days (calendar month) as the divisor — check your employment contract or company policy for specifics.
Worked examples (step-by-step)
Example 1 — Employee covered under the Act
Assumptions:
- Last drawn basic + DA = ₹40,000 / month
- Completed years of service = 12 years and 4 months → rounded to 12 years (or 13 if >6 months rule applies per employer/practice)
Using formula: Gratuity = (Last drawn salary × 15 × Years) ÷ 26
= (40,000 × 15 × 12) ÷ 26
Step 1: 40,000 × 15 = 600,000
Step 2: 600,000 × 12 = 7,200,000
Step 3: 7,200,000 ÷ 26 = ₹276,923.08
Result ≈ ₹2,76,923 (rounding to nearest rupee)
Example 2 — Employer not covered by the Act (uses ÷30)
Same inputs but divisor = 30:
Gratuity = (40,000 × 15 × 12) ÷ 30
= 7,200,000 ÷ 30 = ₹240,000
Result = ₹2,40,000
Rounding & partial year rules
Common practical points:
- “Completed years” usually means whole years; many employers round up service where an employee has worked more than 6 months in the incomplete year — this practice is widely used but check your employer policy or the Act’s precise provision in special cases (e.g., death/disability).
- Some organizations compute gratuity based on the average of last 10 months’ salary (or specified months) instead of simply last drawn salary — check your appointment/HR policy.
Tax treatment & limits
Gratuity received by an employee is eligible for income-tax exemption subject to limits prescribed under the Income Tax Act. The exempt amount limit has been updated in recent years — check current tax notifications for the exact exempt ceiling applicable in your assessment year. (Employers also follow tax rules while reporting gratuity.)
Comparison table — Act covered vs Non-covered employer
| Factor | Covered under Payment of Gratuity Act | Not covered / Contractual |
|---|---|---|
| Formula divisor | ÷ 26 (15/26) | Commonly ÷ 30 (15/30) or as per contract |
| Salary used | Last drawn basic + DA (sometimes commission if specified) | May use average of last 10 months or contractual definition |
| Eligibility | Generally after 5 years' continuous service | Depends on employer policy/contract |
| Rounding | Service exceeding 6 months may be rounded up (practice varies) | As per contract |
| Tax treatment | Exempt up to prescribed limit under Income Tax Act (check current cap) | Tax treatment same; exemption subject to rules |
Practical checklist before you accept gratuity payout
- Confirm whether your employer is covered under the Payment of Gratuity Act.
- Verify the salary components used (basic + DA) and whether average of past months is used.
- Check how your employer treats partial years (rounding policy).
- Ask HR for the gratuity calculation sheet and cross-verify math (use the calculator below).
- Confirm the tax treatment and the exempt amount that applies in that financial year.
Try our Gratuity Calculator
Use our interactive tool to compute gratuity quickly using both common formulas (÷26 and ÷30) and to test rounding options:
Frequently asked questions
Q: What counts as 'last drawn salary' for gratuity?
A: Typically basic salary + dearness allowance. Some employers include commissions or use an average of last several months; check your company policy.
Q: Is gratuity taxable?
A: Gratuity is eligible for income-tax exemption subject to limits under the Income Tax Act. Any amount above the exempt limit may be taxable — confirm current limits for the relevant assessment year.
Q: Can gratuity be paid on resignation?
A: Yes, if eligibility conditions (e.g., 5 years service) are met and employer is covered under the Act; otherwise depends on employer/contract terms.
Disclaimer: This article explains commonly used gratuity rules and examples for educational purposes. Gratuity law and tax limits may change — always verify with official sources or consult your HR/payroll and a tax advisor for precise and up-to-date guidance.