Gratuity Calculator
Calculated under the Payment of Gratuity Act 1972. Consult your HR department or a tax advisor for specific cases involving partial years, non-Act employers, or government service rules.
What is Gratuity?
Gratuity is a lump-sum monetary benefit paid by an employer to an employee as a token of appreciation for the services rendered over the years. It is a retirement benefit mandated by the Payment of Gratuity Act 1972, which applies to all factories, mines, oilfields, plantations, ports, railways, shops, and establishments employing 10 or more persons. Once a company reaches 10 employees, the Act continues to apply even if the employee count later drops below 10.
Gratuity is payable on: retirement or superannuation; resignation after completing 5 years of continuous service; death of the employee (payable to nominee, no 5-year requirement); permanent disability due to accident or disease (no 5-year requirement); and retrenchment. Use our salary calculator to see how gratuity fits into your total CTC.
The Gratuity Formula Explained
The formula under the Act is: Gratuity = (15 × Last Salary × Years) / 26
Breaking down the components:
15 — represents 15 days of wages. The rationale is that the employer pays approximately half a month's salary for every year of service (15 out of 30 days).
Last Salary — means the last drawn Basic Salary + Dearness Allowance (DA). HRA, conveyance allowance, medical allowance, and other special allowances are not included in the gratuity base. If your salary structure has no separate DA, only basic salary is used.
Years of Service — total completed years. A partial year of 6 months or more is rounded up; less than 6 months is ignored.
26 — the number of working days in a month (26 days out of ~30, excluding 4 weekly offs).
Worked example: Basic + DA = ₹50,000/month, 10 years of service:
Gratuity = (15 × 50,000 × 10) / 26 = ₹75,00,000 / 26 = ₹2,88,462
Gratuity Under the Payment of Gratuity Act vs. Non-Covered Employers
| Category | Formula | Minimum Service | Maximum Limit |
|---|---|---|---|
| Covered by Act (10+ employees) | (15 × Salary × Years) / 26 | 5 years | ₹20 lakhs |
| Not covered by Act | (15 × Salary × Years) / 30 | At employer's discretion | No statutory limit |
| Central Govt. employees | (15 × Salary × Years) / 26 + gratuity bonus | 5 years | No limit (fully exempt) |
Tax Treatment of Gratuity
Gratuity received from an employer is taxed under the head "Salaries." However, Section 10(10) of the Income Tax Act provides significant relief:
For employees covered under the Payment of Gratuity Act: The least of the following three is exempt from tax: (a) actual gratuity received; (b) 15 days' salary for each completed year of service; (c) ₹20,00,000. Any amount above ₹20 lakhs is taxable as salary income.
For employees not covered under the Act: The least of: (a) half month's average salary of the last 10 months for each completed year of service; (b) actual gratuity; (c) ₹20,00,000.
For government employees: Gratuity is fully exempt from tax, with no upper limit, subject to rules of the Central Civil Services (Pension) Rules or the equivalent state government rules. Check your overall tax liability with our India income tax calculator.
Frequently Asked Questions
What is the gratuity formula under the Payment of Gratuity Act?
The formula under the Payment of Gratuity Act 1972 is: Gratuity = (15 × Last Drawn Salary × Years of Service) / 26. Here, salary means Basic + Dearness Allowance (DA). The number 15 represents 15 days of wages, and 26 represents the number of working days in a month. For employees not covered by the Act (companies with fewer than 10 employees), a different formula applies: (15 × Salary × Years) / 30.
What is the minimum years of service required to claim gratuity?
You must complete at least 5 years of continuous service with the same employer to be eligible for gratuity. An exception applies in cases of death or disability — if an employee dies or is permanently disabled before completing 5 years, the gratuity is paid to the nominee or legal heir regardless of tenure. For superannuation (retirement), the 5-year rule also applies.
What is the tax exemption on gratuity received?
For employees covered by the Payment of Gratuity Act, gratuity up to ₹20 lakhs is fully exempt from income tax under Section 10(10) of the Income Tax Act. Any amount above ₹20 lakhs is added to your income and taxed at your applicable slab rate. For government employees, the entire gratuity received on retirement is generally exempt without any upper limit. This ₹20 lakh limit was raised from ₹10 lakhs in 2018.
How is years of service counted — is a partial year included?
Under the Payment of Gratuity Act, if the service period in the last year is 6 months or more, it is rounded up to a full year. If it is less than 6 months, it is ignored. For example: 10 years and 7 months is counted as 11 years. 10 years and 4 months is counted as 10 years. This rounding only applies to the final partial year, not to intermediate gaps in service.
What happens to gratuity if I resign before 5 years?
If you leave voluntarily before completing 5 continuous years of service, you are generally not entitled to gratuity under the Payment of Gratuity Act. However, some employers voluntarily pay a partial gratuity as part of their HR policy — this is not legally mandated. If the company lays you off (retrenchment) before 5 years, you are entitled to retrenchment compensation under the Industrial Disputes Act, but not statutory gratuity.
Related Calculators
- EPF Calculator — Calculate EPF corpus at retirement
- NPS Calculator — National Pension System retirement corpus calculator
- India Salary Calculator — CTC to in-hand salary breakdown