Gratuity Explained: How Your Gratuity Amount Is Calculated

Gratuity is a lump-sum payment your employer gives you as a thank-you for long service. It is governed by the Payment of Gratuity Act, 1972, and for most salaried employees in India it becomes a meaningful amount after several years with the same company. Here is exactly how it is worked out.

Who is eligible

You generally become eligible for gratuity after completing five years of continuous service with the same employer. The five-year condition is waived if service ends due to death or disablement. Gratuity is paid when you resign, retire, or your employment otherwise ends after that qualifying period.

The formula

For employees covered by the Act, gratuity is calculated as: (15 × last drawn monthly salary × years of service) ÷ 26. Here “salary” means your basic pay plus dearness allowance (not your full CTC). The number 26 represents the working days in a month, and 15 represents half a month’s wages for each completed year of service.

A worked example

Suppose your last drawn basic + DA is ₹50,000 a month and you have worked for 10 years. Your gratuity is (15 × 50,000 × 10) ÷ 26 = ₹2,88,462 (approximately). Notice that only basic + DA is used, so the figure is usually smaller than people expect if they base it on their total salary.

Rounding of service years

A part-year of service is rounded to the nearest full year only when the extra period is six months or more. So 10 years and 7 months counts as 11 years, while 10 years and 4 months counts as 10 years.

The tax-free limit

Gratuity received is tax-free up to a lifetime limit of ₹20 lakh for employees covered by the Act. Anything above that is taxed as income. For government employees, gratuity is fully exempt.

To calculate your own gratuity, use our Gratuity Calculator — enter your last drawn basic + DA and your years of service to see the amount instantly, using the standard 15/26 formula.