How to Calculate Gratuity in India — Formula, Rules, Eligibility

Gratuity is a lump-sum payment your employer makes when you leave an organization after at least 5 years of continuous service. It's a legal entitlement under the Payment of Gratuity Act, 1972, and can be a substantial amount — often several lakhs.

Here's how to calculate it accurately. You can verify your calculation using the CalcHub gratuity calculator.

Eligibility Rules

You're eligible for gratuity if:

• You've completed 5 or more years of continuous service with the same employer


• You're leaving due to resignation, retirement, superannuation, or death/disability

Exception: In case of death or disability, the 5-year requirement is waived.

Important: Service of 4 years and 240 days (or 4 years and 190 days for seasonal establishments) counts as 5 years for gratuity eligibility.

The Gratuity Formula

For Employees Covered Under the Act:

Gratuity = (Last Drawn Salary × 15 × Years of Service) / 26

Where:

• Last Drawn Salary = Basic Salary + Dearness Allowance (DA)


• 15 = 15 days' wages for each completed year


• 26 = Working days in a month (as per the Act)


• Years of Service = Completed years (months > 6 rounded up)

For Government Employees:

Gratuity = (Last Drawn Salary × 15 × Years of Service) / 30

The denominator is 30 (calendar days) instead of 26.

Worked Example 1: Private Sector Employee

Mr. Kumar's details:

• Last drawn basic salary: Rs 45,000
• Dearness Allowance: Rs 15,000
• Total service: 12 years 8 months

Last Drawn Salary = 45,000 + 15,000 = Rs 60,000
Years of Service = 13 (8 months > 6, so rounded up)

Gratuity = (60,000 × 15 × 13) / 26
Gratuity = 1,17,00,000 / 26
Gratuity = Rs 4,50,000

Worked Example 2: Government Employee

Ms. Sharma's details:

• Last drawn basic + DA: Rs 80,000
• Total service: 25 years

Gratuity = (80,000 × 15 × 25) / 30
Gratuity = 3,00,00,000 / 30
Gratuity = Rs 10,00,000

Maximum Gratuity Limit

The maximum gratuity payable under the Act is Rs 25,00,000 (updated in 2024). Even if the formula yields a higher amount, the employer is only legally required to pay up to this cap. Some employers may voluntarily pay more, but anything above Rs 25 lakhs is taxable.

Tax Treatment of Gratuity

Category	Tax Exemption
Government employees	Fully exempt from income tax
Private sector (covered under Act)	Exempt up to Rs 25,00,000 or the formula amount, whichever is lower
Private sector (not covered under Act)	Exempt up to Rs 25,00,000 or half-month salary × years of service, whichever is lower

The least of three amounts is exempt:

1. Actual gratuity received
2. Rs 25,00,000 (the statutory maximum)
3. 15 days' salary × years of service

Practical Tips

1. Track your service period carefully. If you're at 4 years 7 months, waiting 5 more months to reach 5 years means becoming eligible for gratuity. The financial impact can be significant. 2. Verify what counts as "last drawn salary." Under the Act, it's basic + DA only. Some employers include other components — confirm with your HR department. 3. Rounding matters. If your service is 7 years and 7 months, it rounds up to 8 years. At 7 years and 5 months, it stays at 7 years. The 6-month threshold can add or subtract an entire year's worth of gratuity. 4. Gratuity is separate from PF. Some employees confuse gratuity with their EPF balance. They're completely separate — you're entitled to both.

Is gratuity mandatory for all employers?

The Payment of Gratuity Act applies to every establishment with 10 or more employees. However, even if an establishment is not covered, many employers provide gratuity voluntarily. Check your employment contract.

Can my employer deduct from my gratuity?

Yes, but only for damages caused by the employee to the employer's property. The deduction cannot exceed the loss caused. Normal withholding (like notice period recovery) cannot be deducted from gratuity.

What if my employer refuses to pay gratuity?

You can file a complaint with the Controlling Authority (usually the Labour Commissioner) under Section 8 of the Payment of Gratuity Act. The process is straightforward and doesn't require a lawyer.

Related Calculators

• Gratuity Calculator — instant gratuity calculation
• EPF Calculator — check your provident fund balance and interest
• Income Tax Calculator — calculate tax on gratuity and salary
• Salary Hike Calculator — estimate your raise percentage and new CTC