Gratuity is a lump sum your employer pays when you leave after several years of service, as a reward for staying. It is often part of your CTC, but many employees do not know how it is worked out or whether they qualify. The calculation is short once you know the formula.
Who Is Eligible
- Five years of continuous service with the same employer is the general rule. You receive gratuity when you resign, retire or are laid off after that.
- Fixed-term employees qualify after one year of service under the Code on Social Security, which replaced the Payment of Gratuity Act when the new labour codes came into force.
- Death or disablement: the five-year condition does not apply. Gratuity is paid to the employee or their nominee.
The law covers employers with 10 or more employees. Once an organisation is covered, it stays covered even if headcount later falls below 10.
The Formula
Gratuity = Last drawn salary × 15 × Years of service ÷ 26
- Last drawn salary is your monthly basic pay plus dearness allowance (DA). HRA, special allowance and bonus are not included.
- 15 stands for 15 days of wages for every year of service.
- 26 is the number of working days the law assumes in a month. Dividing salary by 26 gives one day's wage.
- Years of service: a part-year of more than six months counts as a full year. So 7 years 8 months counts as 8 years, but 7 years 5 months counts as 7.
Under the new labour codes, if allowances make up more than half of your total pay, the excess is added back to wages. For people whose basic pay is a small share of their salary, that can raise the gratuity amount.
Worked Examples
- Basic + DA of ₹40,000, 10 years of service: 40,000 × 15 × 10 ÷ 26 = ₹2,30,769.
- Basic + DA of ₹60,000, 7 years 8 months of service: service rounds up to 8 years, so 60,000 × 15 × 8 ÷ 26 = ₹2,76,923.
Gratuity at a Glance
| Last basic + DA | 5 years | 10 years | 20 years |
|---|
| ₹30,000 | ₹86,538 | ₹1,73,077 | ₹3,46,154 |
| ₹50,000 | ₹1,44,231 | ₹2,88,462 | ₹5,76,923 |
| ₹1,00,000 | ₹2,88,462 | ₹5,76,923 | ₹11,53,846 |
Because the formula uses your last salary, every raise increases the gratuity for all your past years too. That is why gratuity grows much faster in the later years of a long career.
The ₹20 Lakh Limit
The maximum gratuity payable under the law is ₹20 lakh. Someone with a last basic pay of ₹2 lakh and 25 years of service would work out to about ₹28.8 lakh by the formula, but the legal entitlement stops at ₹20 lakh. Employers can choose to pay more under their own policy.
Employers Not Covered by the Law
If your employer is not covered but pays gratuity anyway, the formula usually divides by 30 instead of 26, and only completed years count. On ₹40,000 for 10 years, that gives 40,000 × 15 × 10 ÷ 30 = ₹2,00,000, about ₹30,800 less than under the law.
How Gratuity Is Taxed
- Government employees: gratuity is fully exempt from income tax.
- Private-sector employees: gratuity is exempt up to ₹20 lakh across your whole working life. If you receive gratuity from more than one employer, the exemption already used counts towards that limit. Any amount above it is taxed as salary.
Practical Points
- Check your nomination. Make sure your employer has your current nominee details, so the amount reaches your family without delay.
- Know the payment deadline. The employer must pay gratuity within 30 days of it becoming due, and pays interest on any delay.
- Gratuity in CTC is not monthly pay. The 4.81% of basic shown in many CTC breakdowns is a provision, not money you receive each month. Our post on CTC vs in-hand salary explains the difference.
Rules and limits can change, so confirm the details with your HR department or the labour ministry's notifications before you rely on a figure. To work out your own gratuity, enter your last basic pay, DA and years of service in our gratuity calculator below.