Gratuity Calculation Explained: How Much Will You Get?

Gratuity is a lump-sum reward your employer pays you for sticking around - a thank-you for long, continuous service. It is governed by the Payment of Gratuity Act, 1972, and for most salaried Indians it becomes payable once you complete five years with the same employer and then leave, retire, or are separated. The amount can run into lakhs, yet very few employees know how it is worked out until the final settlement lands. This guide breaks down exactly who qualifies, the formula the law uses, how partial years are rounded, a step-by-step worked example, and how much of your gratuity stays tax-free.

Who is eligible for gratuity?#

The core rule is simple - you must have completed five years of continuous service with the same employer. That five-year clock does not restart when you change roles or get promoted within the same company; it only resets if you switch employers. There is one important exception - if service ends due to death or disablement, the five-year condition is waived entirely and gratuity is paid for whatever period was served. Here is when gratuity becomes payable:

• On resignation after 5 or more years of continuous service
• On superannuation or retirement after 5 or more years
• On death of the employee - no minimum service required (paid to nominee)
• On disablement due to accident or disease - no minimum service required

The gratuity formula#

For employees covered by the Payment of Gratuity Act, the calculation is - Gratuity = (15 / 26) x last drawn monthly salary x number of completed years of service. Two things matter here. First, 'salary' means Basic pay plus Dearness Allowance (DA) only - not your full CTC, HRA, or bonuses. Second, the 15 and 26 are fixed by law - 15 represents 15 days' wages for each completed year, and 26 is the number of working days assumed in a month (the four weekly offs are excluded). If you are curious about your own figure, the calculator does this instantly.

The rounding rule for the final year#

The number of years in the formula counts completed years, but the law rounds your final partial year in a specific way - if the leftover months are MORE than 6, that year counts as a full year; if they are 6 months or less, the extra period is dropped. This single rule can swing your payout by a full year's worth of gratuity, so it pays to know where your leaving date falls.

• 7 years 8 months of service -> rounded UP to 8 years
• 7 years 4 months of service -> rounded DOWN to 7 years
• 7 years 6 months exactly -> stays at 7 years (6 months is not 'more than 6')

A worked example#

Suppose your last drawn Basic + DA is ₹50,000 per month and you have completed 10 years of service. Plug the numbers into the formula - Gratuity = (15 / 26) x 50,000 x 10 = ₹2,88,462 (approximately). Note the difference for employees NOT covered by the Act - their employers may use a 15/30 basis instead of 15/26, which uses a full 30-day month and generally produces a slightly lower figure for the same salary and tenure. Always confirm which basis your employer follows before relying on a number.

How gratuity is taxed#

For government employees, gratuity is fully exempt from income tax - no upper limit applies. For everyone else (private sector, PSUs), the exemption is the least of three amounts - the actual gratuity received, the amount worked out by the statutory formula, or the ₹20,00,000 lifetime ceiling. The ₹20 lakh cap is cumulative across your entire career, so if you receive gratuity from more than one employer over the years, the exemptions add up and are measured against that single lifetime limit. Anything beyond the exempt portion is taxable as salary income. Run your own numbers before you resign so there are no surprises in the final settlement.