What Is Gratuity and How Is It Calculated in India?
The Payment of Gratuity Act explained — eligibility rules, the formula with rounding rules, tax exemption limits, forfeiture conditions, and worked INR examples.
TL;DR — Key Points
What Is Gratuity?
Gratuity is a lump-sum payment that an employer makes to an employee as recognition and reward for long service. It is one of the most important statutory benefits in Indian employment law, governed primarily by the Payment of Gratuity Act, 1972. The Act applies to every factory, mine, oil field, plantation, port, railway company, shop or establishment with 10 or more employees at any point during the year.
Unlike provident fund contributions which accrue monthly, gratuity is a one-time payment made when the employment relationship ends — through retirement, resignation, death, or disablement. It is a reward for loyalty and tenure, not a monthly entitlement. The longer you stay, the larger your gratuity.
The formula is straightforward: for each year of service, you earn 15 days of your Basic + DA salary. If your monthly Basic + DA is ₹45,000, each year of service adds ₹45,000 × 15 ÷ 26 = ₹25,962 to your gratuity entitlement. After 10 years, you are entitled to ₹2,59,615. After 25 years, that grows to ₹6,49,038 — a meaningful sum that reflects the true value of employee loyalty.
Understanding gratuity is important for two groups: employees who want to know their rights and what they are entitled to when they leave, and HR/payroll professionals who need to correctly compute and provision for gratuity. Both should understand the eligibility conditions, the rounding rules for partial years, and the forfeiture provisions that are often misunderstood.
The Gratuity Formula Explained
For Act-Covered Establishments (10+ employees)
Gratuity = (Last Salary × 15 × Years of Service) ÷ 26
For Non-Act-Covered Establishments
Gratuity = (Last Salary × 15 × Years of Service) ÷ 30
| Component | Meaning | Example |
|---|---|---|
| Last drawn salary | Basic salary + Dearness Allowance (DA). Does NOT include HRA, conveyance, bonus, or other allowances. | Basic: ₹40,000 + DA: ₹5,000 = ₹45,000 |
| 15 (numerator days) | Represents 15 working days for each completed year of service. This is the statutory entitlement. | 15 days × number of service years |
| 26 (denominator) | Standard working days in a month (excluding 4 Sundays from 30). Used for Act-covered establishments. | Monthly salary ÷ 26 = daily rate |
| Years of service | Completed years of service. If last year has 6+ months, it is rounded up to a full year. If less than 6 months, it is ignored. | 4 years 7 months = 5 years. 4 years 4 months = 4 years. |
Critical rounding rule: For eligibility, you need 5 completed years — no rounding. For the calculation amount, if the last year has 6 or more months, it rounds up to a full year. If it has 5 or fewer months, that partial year is excluded. Example: 7 years 8 months = 8 years for calculation. 7 years 4 months = 7 years for calculation.
Worked Examples
Example 1 — Employee completing exactly 10 years
Gratuity = (45,000 × 15 × 10) ÷ 26 = ₹67,50,000 ÷ 26 = ₹2,59,615
Result: ₹2,59,615
Rounded to nearest rupee. Tax exempt (below ₹20L limit).
Example 2 — Employee with 25 years, high salary
Gratuity = (1,50,000 × 15 × 25) ÷ 26 = ₹5,62,50,000 ÷ 26 = ₹21,63,461
Result: ₹21,63,461 computed, but capped at ₹20,00,000
Maximum statutory limit is ₹20 lakh. ₹1,63,461 excess is not obligatory. ₹20L is fully tax-exempt.
Example 3 — Employee with 7 years 8 months
Gratuity = (33,000 × 15 × 8) ÷ 26 = ₹39,60,000 ÷ 26 = ₹1,52,308
Result: ₹1,52,308
8 months > 6 months, so the last year rounds up to a full year. Service counted as 8 years.
Eligibility — Who Qualifies for Gratuity?
| Situation | Eligible? | Notes |
|---|---|---|
| Resignation after 5+ years | Yes | Standard eligibility. Must have completed 5 full years of continuous service. |
| Resignation before 5 years | No | No gratuity payable under the Act. Employer may pay ex-gratia voluntarily. |
| Retirement (superannuation) | Yes | Full gratuity payable regardless of years worked after the minimum 5-year mark. |
| Death of employee | Yes | Paid to nominee/legal heir. No minimum service requirement. Service rendered up to date of death is considered. |
| Permanent disability | Yes | No minimum service requirement. Gratuity paid for actual years served. |
| Termination by employer | Yes (if 5+ years) | If terminated after 5 years, gratuity must be paid. Termination does not affect eligibility. |
| Termination for misconduct | Partial/Forfeiture | Employer can forfeit gratuity if terminated for violence, riot, or moral turpitude. Cannot forfeit for performance termination. |
| Contract/fixed-term employee | Yes (if 5+ years) | Fixed-term employees whose contract is renewed and total continuous service exceeds 5 years are eligible. |
Tax Treatment of Gratuity
| Employee Category | Exemption | Taxable Amount | Notes |
|---|---|---|---|
| Government employees | Fully exempt | Nothing | All gratuity received by central/state government employees is fully tax-exempt under Section 10(10)(i) |
| Act-covered private employees | Least of: (a) Actual gratuity received, (b) ₹20,00,000, (c) 15/26 × last salary × service years | Amount above the exempt portion | Section 10(10)(ii). If gratuity is ₹25L, exemption is ₹20L, taxable is ₹5L. |
| Non-Act-covered private employees | Least of: (a) Actual gratuity, (b) ₹20,00,000, (c) Half month's average salary × service years | Amount above the exempt portion | Section 10(10)(iii). Average salary = last 10 months' average. Different formula from Act-covered. |
| Gratuity received during service | Fully taxable | 100% | If employer pays gratuity mid-employment (e.g., as ex-gratia), it is fully taxable as salary. |
When Can Gratuity Be Forfeited?
Under Section 4(6) of the Payment of Gratuity Act, gratuity can be wholly or partially forfeited only under specific circumstances. Many employers incorrectly claim forfeiture rights — know your rights:
| Ground | Forfeiture Extent | Notes |
|---|---|---|
| Wilful omission or negligence causing loss/damage | Proportionate to loss caused | Employer must prove financial loss. Cannot forfeit full gratuity for minor negligence. |
| Riotous or disorderly conduct or violence | Full gratuity | One of the two grounds for full forfeiture under Section 4(6)(b)(i) |
| Offence involving moral turpitude during employment | Full gratuity | Second ground for full forfeiture. Requires conviction by a competent court. |
| Poor performance / underperformance | Not allowed | Gratuity cannot be forfeited for performance reasons. Only the two grounds above allow forfeiture. |
| Voluntary resignation | Not allowed | Resignation alone does not forfeit gratuity if the employee has completed 5+ years. |
How to Handle Common Gratuity Scenarios
You are resigning after 4 years 8 months — do you qualify for gratuity?
→ No. The 5-year minimum is counted in completed years. 4 years 8 months = 4 completed years. 8 months does not round up to a full year for eligibility purposes (only for calculation within eligible service). You need 5 full years for eligibility.
You completed 5 years and 9 months — how many years are counted in the formula?
→ 6 years. When calculating the gratuity amount, if the last year has 6+ months, it rounds up to a full year. 5 years + 9 months → 9 months > 6 months → rounds to 6 full years for the formula.
Your employer says they do not have to pay gratuity because you resigned voluntarily
→ This is incorrect. Resignation does not forfeit gratuity. If you have completed 5+ continuous years, gratuity is a statutory right under the Payment of Gratuity Act regardless of the reason for leaving. File an application under Form I with the employer. If employer refuses, approach the Controlling Authority (Labour Commissioner).
Your CTC includes a gratuity component — does that mean it is already included in your salary?
→ Many companies show gratuity as a CTC component (approximately 4.81% of basic salary per year). This is the employer's provisioning cost, not your take-home salary. When you resign after 5 years, you are entitled to receive the actual gratuity amount under the Act — not just the provisioned amount if it differs.
You received ₹25 lakh in gratuity — how much is taxable?
→ Tax exemption is capped at ₹20 lakh. If you are an Act-covered employee and computed gratuity ≤ ₹20L, it is fully exempt. If above ₹20L: ₹20L is exempt, the remaining ₹5L is added to your income and taxed at your slab rate. Report in ITR under 'Income from Salary' with the exemption claimed under Section 10(10).
Your employer refuses to pay gratuity after you have served 7 years
→ File a written application to the employer under Form I within 30 days of gratuity becoming due. If the employer does not respond or refuses, file a complaint with the Controlling Authority (Labour Commissioner) under the Payment of Gratuity Act. The employer must pay within 30 days or pay interest at 10% p.a. on the delayed amount.
Gratuity Calculation Quick Reference
| Scenario | Gratuity Amount | Tax Status | Note |
|---|---|---|---|
| Private sector employee, Basic ₹50K, DA ₹5K, 10 years | ₹3,26,923 | Fully exempt (below ₹20L) | (55,000 × 15 × 10) ÷ 26 |
| Private sector, Basic ₹1,00,000, 20 years | ₹11,53,846 | Fully exempt | (1,00,000 × 15 × 20) ÷ 26 |
| High earner, Basic ₹2,00,000, 30 years — computed | ₹34,61,538 computed, paid ₹20,00,000 | ₹20L exempt, ₹0 taxable (capped at statutory max) | Statutory max caps at ₹20L. Employer not obligated beyond that. |
| Employee dies after 2 years, Basic ₹30,000 | ₹34,615 (2 years, no minimum service requirement for death) | Tax exempt | Paid to nominee. No 5-year rule for death/disability. |
| 7 years 4 months service, Basic ₹45,000 | ₹1,95,673 (7 years, 4 months < 6 so not rounded) | Fully exempt | 4 months < 6 → not rounded. Counted as 7 years only. |
| 7 years 8 months service, Basic ₹45,000 | ₹2,07,692 (8 years, 8 months rounded up) | Fully exempt | 8 months > 6 → rounded to 8 years for calculation. |
Frequently Asked Questions
What is the minimum service required for gratuity?
Five years of continuous service with the same employer. The five-year rule applies to all employees covered under the Payment of Gratuity Act — regardless of whether they resign, are terminated (without misconduct grounds), or retire. The only exceptions are death and permanent disablement, where gratuity is paid for actual service rendered regardless of duration.
Is gratuity calculated on basic salary or CTC?
Gratuity is calculated on Basic Salary plus Dearness Allowance (DA) only. It does not include HRA, conveyance allowance, special allowances, bonus, commission, or any other component. Most private sector companies do not pay DA (it is primarily a government sector component), so for private employees, gratuity is typically calculated on basic salary alone. The basic salary shown in your salary slip — not your CTC — is the relevant figure.
What happens to gratuity if I change employers?
Gratuity does not transfer between employers. Each employer-employee relationship is separate under the Act. If you leave Employer A after 4 years (no gratuity) and join Employer B, your service counter restarts from zero with Employer B. After 5 years with Employer B, you qualify for gratuity from Employer B based on your salary and service there. There is no provision to carry forward or aggregate service across employers for gratuity purposes.
Can an employer pay more than the statutory gratuity?
Yes. The Payment of Gratuity Act sets the minimum that must be paid. Employers can voluntarily pay more as ex-gratia. Some companies have their own gratuity policies that are more generous — for example, calculating on total gross salary rather than basic+DA, or using a higher multiplier. The Act-mandated amount is the floor, not the ceiling. Any amount above ₹20 lakh is taxable, whether mandated or voluntary.
How long does the employer have to pay gratuity after I leave?
The employer must pay gratuity within 30 days of it becoming payable (i.e., within 30 days of your last working day). If payment is delayed beyond 30 days, the employer must pay simple interest at the rate prescribed by the government (currently 10% per annum) on the overdue amount. If the employer disputes the claim, they must pay the undisputed portion within 30 days and contest only the disputed part before the Controlling Authority.
Is the gratuity component in my CTC actually being invested somewhere?
Employers have the option to fund gratuity through a Gratuity Trust (approved under the Income Tax Act), an LIC Group Gratuity scheme, or simply pay it from company funds when it becomes due. The 'gratuity' line in your CTC is the employer's cost provision — approximately 4.81% of basic salary per year (which is the 15/26 formula converted to a monthly rate: 15÷26÷12 = 4.81%). You will receive the actual gratuity amount under the Act formula when you leave, not necessarily what was provisioned in your CTC.
Can gratuity be paid in instalments?
No. Under the Payment of Gratuity Act, gratuity must be paid as a lump sum. The employer cannot split it into instalments without the employee's consent. If the employer requests instalments due to financial difficulty, you are not legally required to agree. You can insist on lump sum payment and, if denied, approach the Controlling Authority. Some companies negotiate mutually agreeable payment schedules in cases of large gratuity amounts, but this must be voluntary on both sides.
What if I work for a company with fewer than 10 employees?
The Payment of Gratuity Act applies only to establishments with 10 or more employees. Companies with fewer than 10 employees are not legally required to pay gratuity under the Act. However, some states have separate gratuity provisions for smaller establishments. Employees in sub-10 organisations can negotiate gratuity as part of their employment contract — it becomes a contractual obligation rather than a statutory one. Many small companies voluntarily follow the Act formula as good practice.
Related Concepts
Related Tools
Gratuity Calculator India
Calculate your gratuity amount using the Payment of Gratuity Act formula with rounding rules.
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Calculate income tax on gratuity and total income under both old and new regimes.
SIP Calculator
Invest your gratuity corpus in mutual funds and project long-term wealth creation.