How Gratuity is Calculated in India: Formula, Eligibility, and Tax Rules

What is gratuity?

Gratuity is a lump-sum retirement or exit benefit governed primarily by the Payment of Gratuity Act, 1972. It generally applies to establishments with 10 or more employees. Employers often show a gratuity provision inside CTC even though the amount is paid only when a qualifying event occurs.

Eligibility rules

The usual requirement is five years of continuous service with the same employer. The five-year condition is not required in cases such as death or disablement, where the law provides special treatment. Resignation, retirement, termination, and superannuation can all trigger payment when the service requirement is met.

The gratuity formula

For employees covered by the Act, the standard formula is:

Gratuity = (Last drawn basic salary × 15 × completed years of service) / 26

Here, 15 represents fifteen days of wages and 26 represents the working days used in the statutory calculation. A service period with more than six months in the final year is generally rounded up for this calculation.

Worked example

Suppose your last drawn basic salary is ₹50,000 per month and you complete 8 years:

(₹50,000 × 15 × 8) / 26 = ₹2,30,769

This is the statutory estimate before considering any payroll rounding or a more favourable contractual benefit.

Use the Gratuity Calculator for a quick estimate, and compare the result with your In-Hand Salary Calculator result to understand how benefits sit outside monthly cash pay.

Maximum gratuity and tax rules

The current maximum gratuity ceiling is ₹20,00,000, following the 2018 amendment. Government employees generally receive a fully exempt gratuity under the applicable service rules. For private employees covered under the Act, gratuity is exempt up to ₹20,00,000 subject to the statutory calculation and the lifetime ceiling. Any amount above the applicable exemption may be taxable.

What if you leave before five years?

In a normal resignation or termination before five completed years, there is usually no legal entitlement under the Act. Some employment contracts provide a better benefit, and death or disablement are important statutory exceptions. Ask HR how the company treats partial service and whether it has an internal gratuity policy more generous than the minimum.

How gratuity appears in CTC

Many employers provision gratuity at 4.81% of basic salary each year. This is not money deducted from your payslip and is not normally paid every month. It is an employer-side cost reserved for a future liability. Read CTC vs In-Hand Salary to see why this provision lowers the cash portion of a quoted CTC.

Frequently asked questions

Is gratuity paid every year?

No. It is generally paid when employment ends after eligibility is met. The annual CTC provision is an accounting estimate, not an annual cash payout.

Does gratuity use basic salary or gross salary?

The statutory formula uses last drawn basic salary plus qualifying dearness allowance where applicable, not the full gross salary.

Is five years counted from joining date?

Yes, continuous service is counted from the date you joined. Check the final date and service records with HR, especially when notice periods cross an anniversary.

Can my company pay more than the formula?

Yes. An employment contract or company policy may provide a better benefit, but it cannot reduce the statutory entitlement where the Act applies.

Can I calculate gratuity while still employed?

You can estimate it using your current basic salary and completed service. The final amount uses your last drawn eligible salary and the completed service at exit.

For another view of deductions and salary components, read How to Read Your Salary Slip.