How to Calculate Gratuity in India — Rules, Formula & Eligibility 2026

Gratuity is a lump-sum amount that your employer pays you as a reward for your years of service when you leave the company. It is one of the most important retirement benefits for salaried employees in India, yet most people are unaware of how it is calculated, when they become eligible, and how much of it is tax-free. This comprehensive guide covers everything you need to know about gratuity in India for 2026.

What is Gratuity?

Gratuity is a monetary benefit given by an employer to an employee who has rendered continuous service of at least 5 years. It is governed by the Payment of Gratuity Act, 1972, which applies to factories, mines, oilfields, plantations, ports, railway companies, and every shop or establishment with 10 or more employees. Even if your company is not covered under the Act, you may still receive gratuity based on your employment contract.

Who is Eligible for Gratuity?

To be eligible for gratuity under the Payment of Gratuity Act, you must meet these conditions:

• Minimum 5 years of continuous service: You must have completed at least 4 years and 240 days (or 190 days for seasonal work) in the fifth year. Courts have ruled that 4 years and 240 days count as 5 years.
• Applicable events: Gratuity is payable on superannuation (retirement), resignation after 5 years, death, or disablement due to accident or disease.
• Exception for death/disability: If an employee dies or becomes disabled, gratuity is payable even if they have not completed 5 years of service.

Use the Gratuity Calculator to instantly compute your gratuity amount based on your salary and years of service.

Gratuity Calculation Formula

The formula differs based on whether your company is covered under the Payment of Gratuity Act or not.

Formula for Employees Covered Under the Act

Gratuity = (Last Drawn Salary x 15 x Years of Service) / 26

• Last Drawn Salary = Basic Salary + Dearness Allowance (DA)
• 15 = 15 days of wages for every completed year of service
• 26 = Working days in a month (as per the Act)
• Years of Service = Completed years (service of more than 6 months in the last year is rounded up)

Formula for Employees NOT Covered Under the Act

Gratuity = (Last Drawn Salary x 15 x Years of Service) / 30

The only difference is the denominator: 30 (calendar days) instead of 26 (working days). This means the gratuity amount is slightly lower for employees not covered under the Act.

Gratuity Calculation Examples

Example 1: Employee Covered Under the Act

Rahul has worked at a manufacturing company for 12 years. His last drawn Basic Salary is Rs 45,000 and DA is Rs 10,000.

• Last Drawn Salary = Rs 45,000 + Rs 10,000 = Rs 55,000
• Gratuity = (55,000 x 15 x 12) / 26
• Gratuity = 99,00,000 / 26
• Gratuity = Rs 3,80,769

Example 2: Employee NOT Covered Under the Act

Priya works at a private IT firm (not covered under the Act) for 8 years. Her last drawn Basic + DA is Rs 70,000.

• Gratuity = (70,000 x 15 x 8) / 30
• Gratuity = 84,00,000 / 30
• Gratuity = Rs 2,80,000

If Priya were covered under the Act, her gratuity would be Rs 3,23,077 — about Rs 43,000 more. Check your own numbers with the Gratuity Calculator.

Maximum Gratuity Limit in 2026

The government has set a maximum gratuity limit of Rs 25 lakh (revised from Rs 20 lakh in 2024). This means even if the formula gives you a higher amount, the employer is only legally required to pay Rs 25 lakh. However, many private companies pay gratuity above this limit as part of their HR policy.

Tax Exemption on Gratuity

The tax treatment of gratuity depends on whether you are a government or private employee:

• Government employees: Gratuity is fully exempt from income tax under Section 10(10)(i).
• Private employees covered under the Act: The least of these three is exempt: (a) Rs 25 lakh, (b) 15 days salary per year of service (calculated using last drawn salary / 26), or (c) Actual gratuity received.
• Private employees NOT covered under the Act: The least of these three is exempt: (a) Rs 25 lakh, (b) Half month salary per year of service (calculated using average salary of last 10 months / 2), or (c) Actual gratuity received.

Any amount above the exemption limit is taxable as "Income from Salary." Use a Income Tax Calculator to estimate your tax liability on the taxable portion.

Important Rules to Remember

• Forfeiture: An employer can forfeit gratuity partially or fully if an employee is terminated for misconduct involving moral turpitude, such as theft, fraud, or violence during employment.
• Nomination: Every employee must file a nomination form (Form F) specifying who should receive the gratuity in case of the employee's death.
• Payment timeline: The employer must pay gratuity within 30 days of it becoming payable. Delay attracts simple interest at the rate notified by the government.
• No deduction from salary: Gratuity is entirely funded by the employer. No amount can be deducted from the employee's salary for gratuity.

Frequently Asked Questions

Q: Is gratuity applicable to contract employees?

Yes, if a contract employee has completed 5 years of continuous service with the same employer, they are eligible for gratuity. The Supreme Court has upheld this in multiple judgments. The nature of employment (permanent or contractual) does not affect gratuity eligibility.

Q: What happens to gratuity if I change jobs before 5 years?

Unfortunately, you forfeit the gratuity if you leave before completing 5 years. The gratuity clock resets at your new employer. This is why many financial advisors recommend staying at least 5 years to secure your gratuity benefit.

Q: Is gratuity included in CTC?

Yes, most companies include gratuity as part of the CTC (Cost to Company). Typically, the gratuity component in CTC is calculated as 4.81% of Basic Salary (which equals Basic x 15/26/12). Use the CTC to In-Hand Salary Calculator to understand your complete salary breakup.

Q: Can I receive gratuity from multiple employers?

Yes. The Rs 25 lakh tax exemption limit applies to the total gratuity received from all employers during your lifetime. If you have already claimed exemption on Rs 15 lakh from a previous employer, you can only claim exemption on Rs 10 lakh from the next employer.