What is gratuity and who is eligible?

Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for their service. Under the Payment of Gratuity Act 1972, any employee who has completed 5 or more years of continuous service is eligible. It applies to organizations with 10 or more employees.

Is gratuity taxable in India?

Gratuity is tax-exempt up to Rs 20 lakhs for employees covered under the Gratuity Act. For government employees, the entire gratuity amount is tax-free. Any amount exceeding the exemption limit is taxed as per the individual's income tax slab.

What is the maximum gratuity limit in India?

The maximum tax-exempt gratuity amount was increased from Rs 10 lakhs to Rs 20 lakhs effective March 2019. There is no cap on the actual gratuity amount an employer can pay, but the tax exemption is limited to Rs 20 lakhs.

Can I get gratuity before 5 years?

Under the Payment of Gratuity Act, the minimum service requirement is 5 years. However, gratuity is payable even before 5 years in case of death or disability of the employee. Some employers may voluntarily pay gratuity for shorter service periods.

Is gratuity deducted from salary every month?

No, gratuity is not deducted from your monthly salary. It is a benefit paid entirely by the employer. However, many companies include it as a component of CTC (Cost to Company), typically at 4.81% of basic salary, which reduces your in-hand salary indirectly.

What happens to gratuity if I resign?

If you resign after completing 5 years of continuous service, you are entitled to receive gratuity. The employer must pay gratuity within 30 days of it becoming payable. If the employer delays payment, they must pay simple interest on the amount.

How is 15/26 calculated in the gratuity formula?

The fraction 15/26 represents 15 days of wages for every year of service. The denominator is 26 (not 30) because a month is considered to have 26 working days after excluding 4 Sundays. This is as per the Payment of Gratuity Act 1972.

Is gratuity part of CTC?

Yes, most private sector companies include gratuity as part of CTC. It is typically calculated as 4.81% of basic salary (which equals 15/26 x 12 months). Though it is part of CTC, it is only paid out after 5 years of service.

What is the gratuity formula for 10 years of service?

For 10 years of service with a last drawn basic salary of Rs 50,000/month: Gratuity = Rs 50,000 x 15/26 x 10 = Rs 2,88,462. This amount is fully tax-exempt as it is below the Rs 20 lakh limit.

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Q: How is gratuity calculated?

For employees covered under the Gratuity Act: Gratuity = (Last drawn Basic Salary + DA) x 15/26 x Years of Service. For employees not covered: Gratuity = (Last drawn Basic Salary + DA) x 15/30 x Years of Service. Service of 6 months or more in the last year is rounded up to the next full year.

What is Gratuity?

Gratuity is a lump-sum monetary benefit paid by an employer to an employee as a token of recognition for their years of service. It is governed by the Payment of Gratuity Act, 1972, which applies to establishments with 10 or more employees.

Unlike salary or bonuses that you receive regularly, gratuity is a one-time payment made when you leave the organization, provided you have completed at least 5 years of continuous service. In cases of death or disability, gratuity is payable regardless of the service duration.

Gratuity is paid entirely by the employer. It is not deducted from your monthly salary
Minimum 5 years of continuous service is required (except in cases of death or disability)
Tax exemption limit is ₹20 lakhs for employees covered under the Gratuity Act

How is Gratuity Calculated?

Gratuity is calculated using a formula defined in the Payment of Gratuity Act. The formula differs slightly based on whether the employee is covered under the Act or not.

Gratuity = (Basic Salary + DA) × 15/26 × Years of Service

This formula applies to employees covered under the Gratuity Act. For employees not covered under the Act, the formula uses 15/30 instead of 15/26:

Covered under Act: Gratuity = (Basic + DA) × 15/26 × Years of Service

Not covered: Gratuity = (Basic + DA) × 15/30 × Years of Service

15/26 explained: 15 days of wages for every completed year. The denominator is 26 working days in a month (excluding 4 Sundays)

Rounding rule: If the employee has worked for 6 months or more in the last year, it is rounded up to the next full year

Gratuity Calculation with Example

Let's calculate the gratuity for an employee with a monthly basic salary of ₹50,000, no DA, and 10 years of service under the Gratuity Act.

Monthly Basic + DA: ₹50,000 + ₹0 = ₹50,000

Formula: ₹50,000 × 15/26 × 10

Calculation: ₹50,000 × 0.5769 × 10

Gratuity Amount: ₹2,88,462

Tax Exemption: Fully exempt (below ₹20 lakh limit)

Taxable Amount: ₹0

For the same employee with 30 years of service, the gratuity would be ₹8,65,385, still well within the ₹20 lakh tax-free limit.

Why is Gratuity Important?

Gratuity serves as a financial safety net when you leave a job. Here is why understanding your gratuity matters:

Retirement planning: Gratuity is a significant lump-sum component of your retirement corpus, especially after long service periods
Legal right: Under the Payment of Gratuity Act, it is your legal entitlement after 5 years. Employers must pay within 30 days
Tax-efficient benefit: Up to ₹20 lakhs is completely tax-free, making gratuity one of the most tax-efficient benefits available to salaried employees
CTC component: Most companies include gratuity in CTC at 4.81% of basic salary. Understanding this helps you evaluate job offers accurately

How to Use This Gratuity Calculator

This free gratuity calculator uses the Payment of Gratuity Act formula to compute your gratuity amount. Here is how to use it:

Step 1: Enter your last drawn monthly basic salary (not gross salary or CTC)
Step 2: Enter your Dearness Allowance (DA) per month. Enter 0 if your salary does not include DA
Step 3: Enter your total years of service (completed years). If you have worked 6+ months in the last year, round up
Step 4: Select whether you are covered under the Gratuity Act (most private sector employees are) or not

The calculator shows your total gratuity amount, tax-exempt portion (up to ₹20 lakhs), and taxable amount. Download the PDF for a detailed breakdown.

Is Gratuity Taxable?

Gratuity received by employees has specific tax rules under the Income Tax Act. The taxability depends on whether you are a government or private sector employee.

Government employees: Entire gratuity amount is fully tax-exempt, regardless of the amount

Employees covered under Gratuity Act: Exempt up to ₹20 lakhs. Any amount exceeding ₹20 lakhs is taxable at your income tax slab rate

Employees not covered: The least of the following is exempt: (a) ₹20 lakhs, (b) actual gratuity received, (c) half month's salary for each completed year of service

The ₹20 lakh exemption limit was last revised in March 2019 (previously it was ₹10 lakhs). This is the cumulative limit across your entire career, not per employer.

Gratuity Eligibility Rules in India

Not everyone is automatically eligible for gratuity. The Payment of Gratuity Act lays out specific conditions:

5 years minimum service: You must complete at least 5 continuous years with the same employer. The Supreme Court has ruled that 4 years and 240 days also qualifies
10+ employee organizations: The Act applies to factories, mines, oilfields, plantations, ports, railways, and any establishment with 10 or more employees
Exceptions for death/disability: In case of death or permanent disability, gratuity is payable even if the employee has not completed 5 years
Forfeiture: An employer can forfeit gratuity (partially or fully) if the employee is terminated for misconduct involving moral turpitude, provided there is a proper inquiry

Businesses can automate gratuity tracking and computation using Petpooja Payroll, which handles all statutory compliance including gratuity provisioning.

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