Guides / Gratuity: Rules, Formula and Calculation

Gratuity: Rules, Formula and Calculation

Gratuity is a lump-sum payment from your employer for long service. It is paid when you leave, retire or are no longer employed.

The formula

For employees covered by the Payment of Gratuity Act:

Gratuity = last drawn salary × 15 ÷ 26 × years of service

Salary here means basic plus DA. A part year of more than 6 months is usually rounded up.

Example

Last basic + DA of ₹50,000 and 10 years of service:

50,000 × 15 ÷ 26 × 10 = ₹2,88,462

Try your own figures in the Gratuity Calculator.

Eligibility

• Generally 5 years of continuous service.
• The 5-year condition does not apply in cases such as death or disability.
• Newer labour rules may allow some fixed-term employees to qualify sooner. Check with your HR team.

Tax treatment

Gratuity up to ₹20 lakh is generally tax-free for eligible employees. Anything above that is taxable as salary. Check the latest rules.

If your employer is not covered

A different formula applies: salary × 15 ÷ 30 × years of service.

Tips

1. Keep your joining and exit records.
2. Ask HR for the gratuity estimate in writing.
3. Employers must pay within 30 days of it becoming due, under the Act.