Gratuity is a lump-sum reward your employer pays for long, loyal service. If you've worked somewhere for years and are thinking about resigning or retiring, it helps to know exactly how much gratuity you're owed. Here's how it's calculated under the Payment of Gratuity Act, 1972.
What is gratuity?
Gratuity is a statutory benefit paid to employees as a token of appreciation for continuous service. It is governed by the Payment of Gratuity Act, 1972, which applies to establishments with 10 or more employees.
Who is eligible?
- You generally become eligible after completing 5 years of continuous service with the same employer.
- Gratuity is payable on resignation, retirement, or superannuation.
- The 5-year condition is waived in case of death or disablement due to accident or illness.
The gratuity formula (for covered employees)
For employees covered by the Act:
Gratuity = (15 × last drawn salary × years of service) ÷ 26
Here, "last drawn salary" means your basic pay plus dearness allowance, and 26 represents the number of working days in a month.
The rounding rule
In your final year, service of more than six months is rounded up to a full year; six months or less is ignored. So 15 years 7 months counts as 16 years, while 15 years 5 months counts as 15 years.
Worked example
Suppose your last drawn salary (basic + DA) is ₹60,000 and you've completed 10 years of service:
Gratuity = (15 × 60,000 × 10) ÷ 26 = ₹3,46,154 (approx).
Want to skip the maths? Our Gratuity Calculator works it out instantly — just enter your salary and years of service.
Employees not covered by the Act
If your employer is not covered by the Act, gratuity is often calculated as (15 × last drawn salary × years of service) ÷ 30, using average salary of the last 10 months and counting only fully completed years.
Is gratuity taxable?
Gratuity enjoys generous tax treatment. For private employees covered by the Act, gratuity is exempt from income tax up to a notified ceiling (widely referenced at ₹20 lakh), with government employees often fully exempt. The exempt amount is the least of the actual gratuity, the formula amount, or the ceiling.
Disclaimer: Eligibility conditions, formulas and the tax-exemption ceiling can change. Verify the current limits with the latest Ministry of Labour and Income Tax Department rules before relying on these figures.