Gratuity Calculation Formula: Eligibility and Tax Rules
Gratuity is last drawn salary divided by 26, times 15, times completed years. Eligibility, the Rs 20 lakh lifetime exemption and when it can be forfeited.
Gratuity is calculated as your last drawn salary divided by 26, multiplied by 15, multiplied by your completed years of service. You qualify after five years with the same employer. Up to ₹20 lakh is tax exempt, and anything above that is taxed as salary.
The formula looks odd until you see what the numbers mean: 15 is fifteen days’ wages for each year worked, and 26 is the working days in a month once weekly rest days are removed. It is half a month’s pay per year of service.
The formula
For employees covered by the Payment of Gratuity Act, 1972:
Gratuity = (Last drawn salary ÷ 26) × 15 × completed years of service
Last drawn salary means basic pay plus dearness allowance, plus retaining allowance if you receive one. It does not include HRA, conveyance, bonus, overtime or any special allowance.
A worked example. Last drawn basic plus DA of ₹50,000 a month, after 12 years of service:
- ₹50,000 ÷ 26 = ₹1,923 per day
- ₹1,923 × 15 = ₹28,846 per year of service
- ₹28,846 × 12 years = ₹3,46,153
A useful shortcut: the formula works out to roughly 0.577 months of basic pay for every year served. Twenty years of service is about 11.5 months of your final basic salary.
How years are rounded
Only completed years count, with one rule that matters: if the part-year is more than six months, it rounds up. Six months or less is dropped.
So 12 years and 7 months counts as 13. Twelve years and 5 months counts as 12. On a ₹50,000 basic that single year is worth about ₹28,800, which is why resignation timing near a service anniversary is worth checking rather than guessing.
Who is eligible
Two conditions, both of which must hold.
Five years of continuous service with the same employer. Not five years across your career, and not five years across group companies unless service is formally transferred.
The employer must be covered by the Act, which applies to establishments employing ten or more people. Below that threshold an employer may still pay gratuity voluntarily, but the statutory formula and entitlement do not automatically apply.
The exception people do not know about
The five-year requirement is waived where service ends because of death or disablement. In that case gratuity is payable for the service actually completed, however short, and in the case of death it is paid to the nominee.
This is worth knowing because families frequently do not claim it, assuming the five-year rule is absolute.
Tax treatment
For a non-government employee covered by the Act, the exempt amount is the least of three figures:
| # | Limit |
|---|---|
| 1 | ₹20,00,000, the statutory ceiling |
| 2 | Gratuity actually received |
| 3 | Average salary of the last 10 months (basic + DA) × completed years of service |
Anything above the least of those three is taxable under the head Income from Salary, at your slab rate.
The ₹20 lakh ceiling is a lifetime limit, not per employer. If you received ₹8 lakh exempt from one employer earlier in your career, only ₹12 lakh of exemption remains available for later receipts. People who change jobs several times and receive gratuity more than once often miss this and under-declare.
Government employees receive different, generally more favourable, treatment.
When it must be paid
Gratuity becomes payable on resignation, retirement, superannuation, death or disablement, once eligibility is met.
The employer is required to pay within 30 days of it becoming payable. Beyond that, simple interest is payable on the delayed amount.
The process in practice:
- Submit Form I to your employer claiming gratuity, generally within 30 days of it becoming payable.
- The employer must acknowledge and specify the amount and payment date.
- If they refuse or under-pay, the dispute goes to the Controlling Authority under the Act, usually the labour department for your area.
A late claim is not automatically rejected. Employers sometimes tell departing staff that missing the 30-day window forfeits the entitlement; that is not what the Act provides, and delayed claims are routinely accepted with reason shown.
What can reduce or forfeit it
Gratuity is an earned entitlement, not a discretionary bonus, and it cannot be withheld simply because an employer is unhappy about a resignation.
It can be forfeited, wholly or partly, only in defined circumstances: where the employee’s services were terminated for wilful damage or loss to the employer’s property, or for riotous or disorderly conduct, or for an offence involving moral turpitude committed in the course of employment.
Notice what is absent from that list. Serving a shorter notice period, joining a competitor, or leaving on bad terms are not grounds for forfeiture. Withholding gratuity as leverage over a notice-period dispute is a common practice and a poor one.
Nomination, which almost everyone skips
File Form F with your employer nominating who receives your gratuity if you die in service. Do it when you join.
Without a nomination, the amount goes to legal heirs, which means succession documentation, delay, and occasionally dispute, at the worst possible time for a family. It is a single form and it is the highest-value ten minutes of paperwork in your employment file.
Update it after marriage, divorce or a death in the family.
Gratuity in your CTC
Many Indian employers include a gratuity line in the CTC they quote. Two things follow.
First, it is not money you receive unless you complete five years. A CTC of ₹12 lakh that includes ₹35,000 of gratuity is really ₹11.65 lakh in hand terms for anyone who leaves at year three. When comparing offers, strip the gratuity line out of both.
Second, the amount shown in CTC is an employer’s provision, not a promise of a particular payout. What you actually receive is the statutory formula applied to your final basic and DA, which will usually be higher than the early-year provisioning suggests, because your salary grew.
Common questions
Do I get gratuity if I resign before five years?
Not under the Act, unless service ended due to death or disablement. Some employers pay voluntarily; that is policy, not entitlement.
Is 4 years 7 months eligible?
Generally not. The rounding rule applies to completed years for the calculation, not to the five-year eligibility threshold, and this specific question has been litigated with differing outcomes. Take advice on your facts before assuming either way.
Is gratuity taxable?
Up to the least of ₹20 lakh, the amount received, or the last-10-months average times years of service. The excess is taxable as salary.
Is the ₹20 lakh limit per job?
No. It is a lifetime limit across all employers.
What if my employer refuses to pay?
Apply in writing using Form I, then approach the Controlling Authority under the Act if payment is still refused.
Does gratuity apply to contract or gig workers?
It applies to employees of covered establishments. Genuine independent contractors are outside it, which is one of the practical differences between employment and a service contract.
The short version
Last drawn basic plus DA, divided by 26, times 15, times completed years. Five years qualifies you, unless death or disablement ends service sooner. Up to ₹20 lakh is exempt as a lifetime limit across all employers, not per job. File Form F nominating a beneficiary now, and if an employer withholds payment over a notice-period dispute, that is not a ground for forfeiture under the Act.
