If you’ve ever looked at your CTC breakup and wondered why a chunk of it disappears into a line called “Gratuity” that you never actually see in your monthly salary, you’re not alone. Gratuity is one of the least understood parts of Indian compensation — most employees only think about it the day they resign or retire, by which point it’s too late to plan around it.
This guide walks through exactly how gratuity is calculated in India, the formula employers use, worked examples with real numbers, and how much of it is actually tax-free. If you want to see how gratuity fits into your full salary structure, our CTC to In-Hand Salary Calculator guide breaks down every other component too.
What Is Gratuity and Who Is Eligible?
Gratuity is a lump-sum benefit an employer pays an employee as a reward for continuous, long-term service. It’s governed in India by the Payment of Gratuity Act, 1972, which applies to any establishment — factory, mine, plantation, shop, or company — that has 10 or more employees at any point in the preceding 12 months. Once an establishment is covered under the Act, it stays covered even if the headcount later drops below 10.
The standard eligibility rule is 5 years of continuous service with the same employer. There’s one important exception: if an employee dies or becomes disabled due to accident or disease while in service, the 5-year requirement is waived entirely, and gratuity is paid to the employee or their nominee regardless of tenure.
A grey area worth knowing about: several court rulings, including from the Madras High Court, have held that an employee who completes 4 years and 240 days in their fifth year of service should be treated as having completed 5 years for gratuity purposes, since 240 days is legally treated as a full year of “continuous service” under the Act. Not every employer applies this interpretation automatically, so if you’re right on that boundary, it’s worth raising with HR rather than assuming either way.
If you’re close to that 4-years-and-240-days boundary, it’s worth calculating your exact tenure to the day rather than estimating — see our Work Experience Calculator guide for the exact calendar-method calculation (and how it differs from a rough decimal estimate).
If your organisation has fewer than 10 employees and therefore falls outside the Act, you may still be eligible for gratuity under your employment contract or company policy — just calculated with a slightly different formula, covered below.
Fixed-term and contract employees aren’t left out either. Since a 2018 amendment to the Industrial Employment (Standing Orders) Central Rules, fixed-term employees are entitled to gratuity on a pro-rata basis for the period they actually worked, even if that period is shorter than 5 years.
The Gratuity Formula: Two Different Calculations
Which formula applies to you depends on whether your employer is covered under the Payment of Gratuity Act.
Employees Covered Under the Act
For most salaried employees in companies with 10+ staff, the formula is:
Gratuity = (Last drawn salary × 15 × Number of years of service) ÷ 26
Here, “last drawn salary” means your Basic pay + Dearness Allowance (DA) — it does not include HRA, bonuses, or other allowances. The 26 represents the number of working days typically counted in a month (a 6-day work week), and the 15 represents 15 days’ wages for every completed year of service.
For rounding: if your service period includes a fraction of a year that is 6 months or more, it’s rounded up to the next full year. For example, 12 years and 7 months becomes 13 years for the calculation. If the fraction is less than 6 months, it’s rounded down.
Employees Not Covered Under the Act
If your employer isn’t covered by the Act (typically smaller companies with under 10 employees), many still pay gratuity voluntarily, using this formula instead:
Gratuity = (Last drawn salary × 15 × Number of years of service) ÷ 30
The divisor changes to 30 (a full calendar month) instead of 26. Unlike the covered case, there’s no rounding up for partial years here — only fully completed years of service are counted, and a partial year, however long, is dropped.
Worked Example 1: Employee Covered Under the Act
Suppose Priya works at a mid-sized IT company with over 200 employees (so the Act applies). Her Basic + DA at the time she leaves is ₹52,000 per month, and she has completed 11 years and 8 months of continuous service.
Since 8 months is more than 6 months, her service is rounded up to 12 years for the calculation.
- Last drawn salary: ₹52,000
- Years of service (rounded): 12
- Gratuity = (52,000 × 15 × 12) ÷ 26
- Gratuity = 9,360,000 ÷ 26
- Gratuity = ₹3,60,000
Priya is entitled to a gratuity payout of ₹3,60,000 when she leaves the company, on top of her final settlement of leave encashment, notice pay, and any other dues.
Worked Example 2: Employee Not Covered Under the Act
Now suppose Arjun works at a small design studio with 7 employees, so the Payment of Gratuity Act doesn’t technically apply, but the studio pays gratuity as a matter of policy. His Basic + DA is ₹40,000 per month, and he has completed 9 years and 4 months of service.
Because this formula doesn’t round up partial years, only the completed 9 years count — the extra 4 months are dropped entirely.
- Last drawn salary: ₹40,000
- Years of service (completed only): 9
- Gratuity = (40,000 × 15 × 9) ÷ 30
- Gratuity = 5,400,000 ÷ 30
- Gratuity = ₹1,80,000
Notice how the same 15-day-per-year logic produces a meaningfully different number once the divisor and rounding rule change — this is exactly why it matters which category your employment falls under before you estimate your own payout.
Is Gratuity Taxable? Tax Exemption Rules Explained
This is where most people get surprised, because the tax treatment depends on who you work for.
Government employees (Central Government, State Government, or local authority staff) receive gratuity that is fully exempt from income tax, with no upper limit.
Private-sector employees covered under the Payment of Gratuity Act get an exemption under Section 10(10) of the Income Tax Act equal to the least of these three amounts:
- The actual gratuity received
- ₹20,00,000 (the current statutory ceiling, raised from ₹10 lakh in 2019)
- 15/26 × last drawn salary × number of years of service (i.e., the amount calculated using the same formula above)
Taking Priya’s example above: her actual gratuity received (₹3,60,000) is well below the ₹20 lakh ceiling and matches the formula amount exactly, so her entire ₹3,60,000 payout is tax-free.
Private-sector employees not covered under the Act also get an exemption, but calculated as the least of:
- The actual gratuity received
- ₹20,00,000
- Half a month’s average salary (based on the last 10 months before leaving) × number of completed years of service
In practice, for most salaried employees whose gratuity stays well under ₹20 lakh, the entire amount ends up tax-free regardless of which category applies — the ceiling mainly affects senior employees with very long tenures and high salaries.
How Gratuity Fits Into Your CTC and Take-Home Pay
Many companies in India include an estimated gratuity contribution as a line item inside your CTC (Cost to Company), even though you’ll never see that money in a monthly payslip — it’s held back and paid out only when you leave after completing the eligibility period. This is one of the reasons your CTC number always looks bigger than your actual take-home pay.
If your offer letter shows a gratuity component and you want to understand exactly how that affects your monthly in-hand salary, walk through our CTC to In-Hand Salary Calculator guide, which breaks down every deduction between your CTC and what actually lands in your bank account. And since gratuity payouts interact with your total taxable income in the year you receive them, it’s worth cross-checking the impact using our Old vs New Tax Regime comparison before deciding how to plan withdrawals around a job change or retirement.
Situations That Commonly Cause Confusion
Resigning before 5 years: If you resign voluntarily before completing 5 years of continuous service (and don’t qualify for the death/disablement exception or the 4-years-240-days interpretation), you generally forfeit gratuity entirely — it isn’t paid on a pro-rata basis for shorter tenures.
Switching employers: Gratuity doesn’t transfer between jobs. Each employer calculates and pays gratuity independently based on your service with them alone, so job-hopping every 2-3 years means you may never accumulate enough tenure anywhere to qualify.
Notice period: Your last working day — not your notice period on paper — is what counts toward your total years of service. Serving out a notice period does add to your tenure right up until your actual relieving date.
The ₹20 lakh ceiling: This limit applies to the tax-exempt portion, not to how much gratuity an employer can pay. An employer can legally pay more than ₹20 lakh if their internal policy or a settlement allows it — the excess above the exemption limit is simply added to your taxable income for that year.
Frequently Asked Questions
Is gratuity mandatory for all employers in India?
It’s mandatory for any establishment with 10 or more employees under the Payment of Gratuity Act, 1972. Smaller establishments aren’t legally required to pay it, though many do so voluntarily as part of their compensation policy.
What happens if I resign before completing 5 years?
In most cases you won’t receive gratuity, since the standard eligibility threshold is 5 years of continuous service. The main exceptions are death or disablement during service, where the 5-year rule doesn’t apply.
Does my notice period count toward my years of service?
Yes — your years of service are counted up to your actual last working day, which includes any notice period you serve, not just the date you submitted your resignation.
Can my gratuity payout exceed ₹20 lakh?
Yes, an employer can pay more than ₹20 lakh if their policy allows it. However, only the first ₹20 lakh is exempt from income tax under Section 10(10) for private-sector employees — any amount above that is taxable as salary income in the year you receive it.
Are contract or fixed-term employees eligible for gratuity?
Fixed-term employees became eligible for pro-rata gratuity following a 2018 amendment to the Industrial Employment (Standing Orders) Central Rules, even without completing 5 years, provided their contract has clearly defined start and end dates.
How and when is gratuity actually paid out?
Gratuity is typically paid as a lump sum along with your final settlement — usually within 30 days of your last working day, alongside dues like leave encashment and any pending reimbursements. Employers who delay payment beyond this window are liable to pay simple interest on the outstanding amount.
This guide explains the standard formulas under the Payment of Gratuity Act, 1972 and current Income Tax Act provisions for illustration purposes. Exact figures can vary based on your specific employment contract, state-level rules, and any policy changes after publication — confirm your final numbers with your HR or payroll team, or a qualified tax advisor, before making financial decisions.