What Is Gratuity?
Gratuity is a lump-sum payment made by an employer to an employee as recognition for long, continuous service. It is governed by the Payment of Gratuity Act, 1972, one of India's core labour laws.
The Act mandates gratuity for employees who complete at least 5 years of continuous service at an organisation with 10 or more people.
Unlike a provident fund, gratuity comes entirely from the employer, with no deduction from the employee's salary.
It is separate from other retirement income like NPS or EPF, and factors into an overall retirement plan as a lump sum, not a recurring payout.
Gratuity Formula: How to Calculate Gratuity
Employers in India calculate gratuity using the statutory formula:
Gratuity = (15 × Last Drawn Salary × Years of Service) / 26
Here, 15 is the days of salary paid per completed year, salary means Basic Pay plus DA only, and 26 is the statutory average working days in a month.
Employees effectively receive close to half a month's basic salary for every year of completed service.
Worked example
A basic salary of Rs 50,000 a month for 5 years works out to ₹1,44,231. At Rs 1,00,000 a month for the same 5 years, it is ₹2,88,462. Enter your own numbers in the calculator above for an exact figure.
Gratuity Eligibility Criteria
Not every employee automatically qualifies for gratuity. These are the conditions under the Act:
5 years of continuous service
You must have worked with the same employer for 5 continuous years. A partial year beyond 6 months rounds up to a full year.
Organisation with 10 or more employees
The Act applies to organisations with 10 or more employees on any day in the preceding twelve months.
Exception: death or disablement
If service ends due to death or permanent disablement, the 5-year requirement is waived entirely.
Contractual and temporary staff
Temporary, contractual, and permanent employees are all covered under the Act once eligibility conditions are met.
Gratuity Tax Treatment
Up to Rs 25 lakh of gratuity received by a private-sector employee is exempt from tax under Section 10(10). Anything above that is taxed at your slab rate.
This is a lifetime ceiling across every employer, not per employer. Government employees get full tax exemption on their entire gratuity, with no ceiling.
To see how a taxable gratuity portion affects your total tax bill for the year, run it through the Income Tax Calculator alongside your regular salary income.
Private vs Government Employee Gratuity
Government employees do not use the Payment of Gratuity Act formula. They receive Death-cum-Retirement Gratuity (DCRG) instead, calculated differently and capped differently.
| Factor | Private Sector (Gratuity Act) | Government (DCRG) |
|---|---|---|
| Formula | (15 × Salary × Years) / 26 | (6-month periods of service) × Last Pay / 4 |
| Tax exemption | Up to Rs 25 lakh | Fully exempt, no ceiling |
| Statutory maximum payout | No ceiling on the formula result | Capped at Rs 20 lakh |
Retirement Calculator
See how gratuity fits alongside EPF, NPS, and savings in your full retirement corpus.
How to Use This Gratuity Calculator
The calculator needs two inputs:
- Basic Salary + DA: enter your last drawn basic salary plus Dearness Allowance. Exclude HRA, bonuses, commissions, or other allowances.
- Years of Service: set the total duration of your employment, switching between years and months for a precise entry.
- Check eligibility: the calculator shows whether you meet the 5-year minimum, and whether the 6-month rounding rule applied.
- Review the result: read the gratuity payable, the tax-free and taxable split, and expand the accrual schedule to see growth over time.
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