Gratuity in India: Rules, Eligibility, and How It's Calculated

Gratuity is a lump-sum reward your employer pays for long service — a genuine thank-you for sticking with the organisation over the years. Many salaried people know the word from their offer letter but are unsure who qualifies, how the amount is worked out, and how much of it is tax-free. This guide walks through the rules under the Payment of Gratuity Act with a clear worked example.

Who is eligible

The Payment of Gratuity Act applies to establishments employing 10 or more people, including factories, shops, and most companies. The core condition is service length:

• You become eligible for gratuity after completing five years of continuous service with the same employer.
• The five-year rule is waived if service ends due to death or disablement caused by accident or illness — in those cases gratuity is payable regardless of tenure.

Gratuity is paid on exit — whether you resign, retire, are laid off, or in the unfortunate event of death or disability. It is not deducted from your salary; it is an amount your employer owes you on top of everything else.

The formula for covered employees

For employees covered by the Act, the formula is:

Gratuity = (last drawn basic salary + dearness allowance) x 15/26 x number of completed years of service

A few points explain the pieces:

• Last drawn salary means basic pay plus dearness allowance (DA) in your final month — not your full CTC. Allowances like HRA are not included.
• 15/26 represents 15 days of wages for each year, treating a month as 26 working days.
• Years of service use a rounding rule: a part-year of more than six months counts as a full year, while six months or less is dropped. So 7 years 8 months counts as 8 years, but 7 years 4 months counts as 7.

A worked example

Suppose Meera resigns after 7 years and 8 months. Her last drawn basic plus DA is ₹50,000 a month. Because 8 months is more than six, her service rounds up to 8 years.

Step	Value
Last drawn basic + DA	₹50,000
Completed years (rounded)	8
Calculation	50,000 x 15/26 x 8
Gratuity payable	₹2,30,769 (approx.)

You can run your own numbers with our gratuity calculator, which applies the formula and rounding for you. If you want to see how gratuity, EPF, and other components fit into your overall pay, the salary take-home calculator puts the whole package in one place.

How much gratuity is tax-free

Gratuity received is exempt from income tax up to a limit. For employees covered by the Act, the exempt amount is the least of these three:

• The actual gratuity received;
• The statutory ceiling of ₹20 lakh (a lifetime limit across employers);
• The amount arrived at by the formula (15/26 x last drawn salary x years).

Anything above the exempt figure is added to your income and taxed at your slab rate. In Meera's case, since her gratuity of about ₹2.3 lakh is well under ₹20 lakh and equals the formula amount, the entire sum is tax-free.

When it is paid and the role of nomination

Your employer is expected to pay gratuity within 30 days of it becoming due, and delays can attract interest. It is triggered by resignation, retirement, layoff, death, or disablement. When you join, you are usually asked to fill a nomination form naming who should receive the gratuity if you die — keep this updated, especially after marriage or a change in family circumstances, so the payout reaches the right person without dispute.

Common misunderstandings

• Gratuity is not the same as EPF. Your provident fund is built from monthly contributions by you and your employer; gratuity is a separate, service-linked payment funded entirely by the employer.
• It is not based on your full CTC. Only basic pay and DA feed the formula, so the amount is usually smaller than people expect.
• The five-year clock is per employer. Changing jobs before five years generally means no gratuity from that employer, except in cases of death or disability.
• Rounding matters. A few extra months of service can add a full year to the calculation if you cross the six-month mark.

Key takeaways

• Gratuity is payable after five years of continuous service (waived for death or disability) at establishments with 10 or more employees.
• The formula for covered employees is last drawn basic plus DA, times 15/26, times completed years, with part-years over six months rounded up.
• The tax exemption is the least of actual gratuity, ₹20 lakh, or the formula amount.
• It is separate from EPF, based only on basic and DA, and should be paid within 30 days of leaving.

This article is for general information and not tax or legal advice. Rules and limits can change, so confirm the current position with your employer or a qualified professional before making decisions.