Gratuity Calculator — Eligibility, Formula & Tax Rules

Gratuity is one of the most important retirement benefits available to employees in India, yet it remains widely misunderstood. Unlike a bonus or incentive, gratuity is a statutory right — your employer is legally obligated to pay it under the Payment of Gratuity Act, 1972. It is not a discretionary benefit or a favour; it is compensation for your years of loyal service.

Despite being a legal entitlement, many employees are unaware of exactly how much gratuity they are owed, what formula applies to their situation, and how much of it is tax-free. The calculation differs between private sector and government employees, and the tax treatment involves three separate categories with different exemption limits. This guide covers every aspect of gratuity in India — from the basic formula to edge cases like death, disability, and forfeiture — so you can plan your finances accurately.

Use the calculator below to compute your exact gratuity amount, then read the detailed sections to understand eligibility, tax implications, and your legal rights as an employee.

What Is Gratuity and Who Is Eligible?

Which establishments must pay gratuity under the law?

Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for services rendered over a period of time. It is governed by the Payment of Gratuity Act, 1972, which applies to every factory, mine, oilfield, plantation, port, railway company, and every shop or establishment employing 10 or more persons on any day in the preceding 12 months. Once the Act becomes applicable to an establishment, it continues to apply even if the number of employees falls below 10 subsequently.

The Act covers all employees regardless of designation or salary level — including managers, supervisors, and administrative staff. Apprentices engaged under the Apprentices Act, 1961, are the only category explicitly excluded. Importantly, the Act also applies to employees in the private sector, NGOs, educational institutions, and hospitals that meet the 10-employee threshold.

To be eligible for gratuity, an employee must have completed a minimum of 5 years of continuous service with the same employer. This 5-year requirement is waived in cases of death or disability — if an employee dies or becomes permanently disabled, gratuity is payable regardless of tenure. Continuous service means uninterrupted employment, though authorised leave, layoff periods, and periods of sickness or accident (where the employee has been on approved leave) do not break continuity.

The 15/26 Formula for Private Sector Employees

How is gratuity calculated for private sector workers?

For employees covered under the Payment of Gratuity Act (which includes most private sector employees), gratuity is calculated using the following formula:

Gratuity = (Last Drawn Basic Salary + Dearness Allowance) × 15/26 × Completed Years of Service

The number 26 represents the assumed working days in a month (30 calendar days minus 4 Sundays). The number 15 represents half a month's salary for each year of service — effectively, the Act mandates 15 days' wages for every completed year of service, calculated on a 26-day month basis.

Let us work through a detailed example. Suppose Rajesh has worked at an IT company for 10 years. His last drawn basic salary is ₹50,000 per month and his dearness allowance is ₹5,000 per month. His gratuity calculation would be:

Gratuity = (₹50,000 + ₹5,000) × 15/26 × 10 = ₹55,000 × 0.5769 × 10 = ₹3,17,308

A few critical points about this formula. First, only basic salary and DA are considered — HRA, special allowance, conveyance, medical allowance, and other components are excluded. Second, “last drawn” means the salary at the time of leaving employment, not the average salary over your career. Third, years of service are counted as completed years — 10 years and 4 months counts as 10 years. However, if you have served more than 6 months beyond a completed year (e.g., 10 years and 7 months), it is rounded up to 11 years.

Many IT and service sector companies do not have a separate DA component. In such cases, gratuity is calculated purely on basic salary. If your salary structure only shows “Basic” and the remaining as “Special Allowance” or “Flexible Benefit Plan,” only the basic portion is used for the gratuity calculation. Your basic salary also determines your EPF contributions — use our EPF Calculator guide to see how much your employer contributes to PF alongside gratuity provisions.

The 15/30 Formula for Government Employees

Government employees (central and state) are not covered under the Payment of Gratuity Act, 1972. Instead, their gratuity is governed by the Central Civil Services (Pension) Rules or respective state government rules. The formula for government employees uses 30 days per month instead of 26:

Gratuity = (Last Drawn Basic Pay + DA) × 15/30 × Qualifying Service (in completed six-monthly periods)

Using the same example as before — basic pay ₹50,000 + DA ₹5,000, with 10 years of qualifying service:

Gratuity = ₹55,000 × 15/30 × 10 = ₹55,000 × 0.5 × 10 = ₹2,75,000

Notice that the government formula yields a lower amount (₹2,75,000) compared to the private sector formula (₹3,17,308) for the same salary and tenure. This is because dividing by 30 instead of 26 gives a smaller per-day wage figure. However, government employees benefit from full tax exemption on gratuity (more on this in the tax section), and their qualifying service calculation is more generous — any period of service exceeding 6 months in a year is rounded up to the next full year.

Government employees also benefit from the concept of “qualifying service,” which can include periods of study leave, extraordinary leave (under certain conditions), and deputation periods. The maximum gratuity payable to government employees was last revised to ₹20 lakh with effect from 1 January 2016, matching the cap under the Gratuity Act.

The 5-Year Continuous Service Rule

Can you get gratuity with less than 5 years of service?

The 5-year continuous service requirement is the most litigated aspect of the Payment of Gratuity Act. Section 4(1) of the Act states that gratuity is payable to an employee “on the termination of his employment after he has rendered continuous service for not less than five years.” However, the Supreme Court of India has provided important clarifications that every employee should know.

In the landmark case of Surendra Kumar Verma vs Central Government Industrial Tribunal, the Supreme Court ruled that an employee who has completed 4 years and 240 days of continuous service (in an establishment that works 6 days a week) is deemed to have completed 5 years. This is because Section 2A of the Act defines “continuous service” and provides that an employee is considered to have been in continuous service for 1 year if they have worked for 240 days in a 12-month period.

What counts toward continuous service? Authorised leave (paid or unpaid, if approved), maternity leave under the Maternity Benefit Act, sick leave, and periods of layoff are all counted. What may break continuity includes: unauthorised absence, breaks between fixed-term contracts if there is a clear gap in employment, and transfer between companies that are separate legal entities (even within the same corporate group) unless there is an explicit novation agreement transferring the employee's service history.

Contract workers and fixed-term employees face a more complex situation. If a contract worker is employed through a staffing agency, their employer for gratuity purposes is the staffing agency, not the company where they perform work. If their contracts are renewed with a break of even one day between them, the employer may argue that continuous service is broken. Maintaining documentation — offer letters, contract renewals, salary slips — is essential for establishing continuity.

Tax Exemption Under Section 10(10) of the Income Tax Act

Is gratuity fully tax-free under Section 10(10)?

The tax treatment of gratuity is one of the most commonly misunderstood aspects of Indian tax law. Section 10(10) of the Income Tax Act provides exemption for gratuity, but the extent of exemption depends on which category the employee falls into. The taxable portion of gratuity is added to your income and taxed at your applicable slab rate — see our old vs new tax regime guide to understand which regime results in lower tax on this additional income. There are three distinct categories:

Category 1: Government Employees

Gratuity received by employees of the central government, state government, local authority, or any other statutory body is fully exempt from income tax. There is no upper limit on exemption — the entire gratuity amount, regardless of how large, is tax-free. This covers all civil servants, defence personnel, judiciary, and employees of statutory corporations.

Category 2: Employees Covered Under the Payment of Gratuity Act

For private sector employees whose establishment is covered under the Gratuity Act, the exempt amount is the least of the following three:

• Actual gratuity received
• ₹20,00,000 (the statutory limit, enhanced from ₹10 lakh with effect from 29 March 2018)
• 15 days' salary for each completed year of service (calculated as Basic + DA × 15/26 × years)

Any amount exceeding the exempt portion is added to your total income for the financial year in which it is received and taxed at your applicable slab rate. For instance, if your employer pays ₹25 lakh gratuity but the formula-based exemption computes to ₹18 lakh, then ₹18 lakh is exempt (being the least of actual, ₹20L, and formula amount), and ₹7 lakh is taxable.

Category 3: Employees Not Covered Under the Gratuity Act

Some employees work in establishments with fewer than 10 employees or in sectors not covered by the Act, but their employer still pays gratuity as a contractual benefit. For such employees, the exempt amount is the least of:

• Actual gratuity received
• ₹20,00,000
• Half month's average salary for each completed year of service (average salary of last 10 months × 0.5 × years)

Note that for this category, the calculation uses average salary of the last 10 months (not just the last drawn salary) and uses half a month rather than 15/26. This typically results in a lower exempt amount compared to Category 2.

Gratuity Forfeiture — When Can Your Employer Refuse to Pay?

Under what circumstances can gratuity be forfeited?

Section 4(6) of the Payment of Gratuity Act allows an employer to forfeit gratuity, either wholly or partially, but only under two specific circumstances:

1. Termination for moral turpitude: If the employee's services are terminated for any act of moral turpitude — such as fraud, theft, dishonesty, or criminal misconduct — committed during the course of employment, the employer may forfeit the gratuity to the extent of the damage caused to the employer.

2. Termination for riotous or violent behaviour: If the employee's services are terminated for riotous or disorderly conduct, or any act of violence committed during the course of employment, the employer may forfeit the gratuity to the extent of the damage caused.

It is crucial to understand what does NOT constitute grounds for forfeiture. An employer cannot withhold gratuity for: poor performance, not serving the full notice period (unless the employee agrees to a deduction in the settlement letter), breach of non-compete clauses, refusal to sign an NDA, or any reason that is not specifically moral turpitude or violence causing damage. If your employer withholds gratuity citing “policy,” “company rules,” or “performance issues,” they are acting illegally, and you have the right to file a complaint with the Controlling Authority appointed under the Act.

The burden of proof for forfeiture lies with the employer. They must demonstrate that the termination was specifically for moral turpitude or violence, and that the acts were committed during the course of employment. Verbal allegations are insufficient — there must be a proper domestic enquiry, and the employee must have been given a fair opportunity to defend themselves.

Gratuity on Death or Disability

One of the most protective provisions of the Payment of Gratuity Act relates to death and disability. If an employee dies or becomes permanently disabled (whether due to accident, disease, or any other cause), gratuity is payable irrespective of the duration of service. The 5-year continuous service requirement is completely waived in these cases.

In case of death, gratuity is paid to the nominee designated by the employee. If no nomination has been made, it is paid to the legal heirs. The calculation follows the same 15/26 formula, but with an important difference in rounding: for completed years of service, any fraction exceeding 6 months is rounded up. For example, if an employee who has served 3 years and 8 months dies in service, the gratuity is calculated for 4 years (since 8 months exceeds 6 months).

Additionally, the government has prescribed a maximum limit based on the employee's years of service for death cases. The gratuity amount payable on death shall not exceed: twice the basic + DA for less than 1 year of service, 6 times for 1-5 years, 12 times for 5-11 years, and 20 times for 11-20 years and above. If the 15/26 formula gives a higher amount, the employee's family gets the higher of the two.

For disability cases, the same rules apply. The employee receives gratuity without the 5-year service requirement, calculated on the same formula with rounding for fractions above 6 months. Permanent disability that prevents the employee from performing their duties triggers the gratuity payment immediately.

Gratuity as Part of CTC — Understanding the Employer's Perspective

How much of your CTC goes toward gratuity?

If you look closely at your CTC (Cost to Company) breakup, you will likely find a line item for gratuity, typically computed at 4.81% of basic salary. This number comes from the 15/26 formula: 15 divided by 26 divided by 12 months equals 4.81%. For every ₹1,00,000 of annual basic salary, the employer provisions ₹4,810 per year toward your gratuity liability.

It is essential to understand that this gratuity component in your CTC is the employer's cost, not a deduction from your salary. Unlike EPF where both employer and employee contribute, gratuity is entirely funded by the employer. You do not see any gratuity deduction on your payslip. The employer sets aside this amount (or buys a group gratuity insurance policy) to fund the eventual payout.

However, gratuity only becomes payable when you actually leave the organisation after completing 5 years. If you leave before 5 years, you receive zero gratuity, and the employer retains the provisioned amount. This is why some employees view the gratuity component as “locked” money that inflates their CTC on paper but may never materialise.

From a financial planning perspective, you should include accrued gratuity in your net worth calculation only if you intend to stay with your employer for at least 5 years. If you change jobs every 3-4 years, the gratuity component of CTC is effectively lost — and this is one of the hidden costs of frequent job hopping in India. An employee who stays 10 years earns gratuity on the full tenure, while an employee with two 5-year stints at different companies earns two separate (smaller) gratuity payouts, since each is calculated on the last drawn salary at that respective company.