How to Calculate Gratuity in India: Formula, Eligibility & Examples (2026)
If you work in HR or payroll in India, gratuity calculation is one of those compliance tasks you need to get right every time. Get the numbers wrong, and you risk non-compliance penalties or unhappy employees at exit.
This guide covers the gratuity calculation India formula, who qualifies, tax rules, and worked examples so you can compute gratuity accurately, whether manually or through payroll software.
What Is Gratuity?
Gratuity is a lump-sum benefit paid by an employer to an employee as a token of appreciation for long service. Governed by the Payment of Gratuity Act, 1972, it applies to employees who have completed at least five years of continuous service with the same employer.
The Act covers:
- Every factory, mine, oilfield, plantation, port, and railway company
- Every shop or establishment with 10 or more employees on any day in the preceding 12 months
- Once covered, an establishment stays covered even if employee count drops below 10
Gratuity is typically paid at the time of resignation, retirement, or termination — or to the nominee in case of death.
Gratuity vs PF — What Is the Difference?
| Parameter | Gratuity | Provident Fund (PF) |
|---|---|---|
| Who contributes | Employer only | Both employer (12%) and employee (12%) |
| When payable | On exit (after 5 years) or death/disability | On retirement, resignation, or death |
| Governing law | Payment of Gratuity Act, 1972 | EPF & MP Act, 1952 |
| Tax-free limit | Rs. 20 lakh | Fully tax-free after 5 years |
| Calculation basis | Last drawn salary x tenure | Accumulated balance |
For a deeper comparison, see our PF calculation guide.
Who Is Eligible for Gratuity in India?
Under the Payment of Gratuity Act, an employee is eligible if they:
- Have completed 5 or more years of continuous service with the same employer
- Are employed in an establishment covered by the Act
- Separate from service due to resignation, retirement, termination, or death
The 5-Year Rule
The minimum service period is 5 continuous years. This includes periods of layoff, approved leave, and sickness. However, interruptions caused by strikes, lockouts, or unauthorized absence do not count toward continuous service.
The 5-year rule does not apply in case of death or permanent disability. In these cases, gratuity is payable regardless of service length.
There is also a partial exception: if an employee has completed 4 years and 8 months or more, some courts have held this as 5 years of service. However, this interpretation varies by jurisdiction, and employers should seek legal counsel before applying it.
Gratuity on Resignation, Retirement & Death
| Event | Eligibility | Paid To |
|---|---|---|
| Resignation | After 5 years of service | Employee |
| Retirement (superannuation) | On reaching retirement age | Employee |
| Termination | After 5 years (unless terminated for riotous/violent conduct or moral turpitude) | Employee |
| Death or disability | No minimum service required | Nominee or legal heir |
Gratuity Calculation India — The Formula Explained
For employees covered under the Payment of Gratuity Act, the gratuity amount is calculated using this formula:
Standard Formula
Gratuity = (15 x Last Drawn Salary x Years of Service) / 26
Last drawn salary means basic salary + dearness allowance (DA). Years of service counts completed years of continuous service, with service of 6 months or more rounded up. The 15 represents 15 days’ wages per year of service, and 26 is the number of working days in a month.
Example 1: Rs. 40,000 Basic + DA, 7 Years of Service
Say an employee’s last drawn salary (basic + DA) is Rs. 40,000/month, and they have completed 7 years of service.
Gratuity = (15 x 40,000 x 7) / 26 = 42,00,000 / 26 = Rs. 1,61,538 (approx.)
Example 2: Rs. 60,000 Basic + DA, 12 Years of Service
An employee with last drawn salary of Rs. 60,000/month and 12 years of service:
Gratuity = (15 x 60,000 x 12) / 26 = 1,08,00,000 / 26 = Rs. 4,15,385 (approx.)
Note: In both examples, the calculated amount is well below the Rs. 20 lakh tax-free cap. For longer tenures or higher salaries, the cap becomes relevant.
Gratuity Calculation for Employees Not Covered Under the Act
Employees working in establishments not covered by the Payment of Gratuity Act — typically smaller organisations with fewer than 10 employees — still receive gratuity. However, gratuity for private sector employees in non-covered establishments follows a different formula:
Gratuity = (15 x Last Drawn Salary x Years of Service) / 30
The differences:
- The divisor is 30 instead of 26
- Only completed years of service are counted (no rounding up for 6+ months)
- The tax exemption calculation also differs (see tax section below)
Example: An employee in a non-covered establishment with a last drawn salary of Rs. 50,000 and 10 years of service:
Gratuity = (15 x 50,000 x 10) / 30 = Rs. 2,50,000
Maximum Gratuity Limit in India (2026)
The maximum gratuity an employer is legally required to pay under the Act is Rs. 20 lakh. This cap was raised from Rs. 10 lakh through an amendment in 2018.
Rs. 20 Lakh Cap — What Happens Above This?
If the actual calculated gratuity exceeds Rs. 20 lakh, the employer is not legally obligated to pay the excess under the Act. However, some companies choose to pay the difference as an ex-gratia payment.
From a tax perspective:
- Gratuity up to Rs. 20 lakh is exempt from income tax
- Any amount exceeding Rs. 20 lakh is taxable as “Income from Salary”
- The Rs. 20 lakh limit is a lifetime aggregate — it applies across all employers, not per employer
Gratuity Tax Exemption Rules
Gratuity tax treatment depends on whether the employee is covered under the Act and whether they work in the private or government sector.
Tax-Free Gratuity Limits
For government employees: Gratuity received on retirement or death is fully exempt from income tax, with no upper limit.
For private sector employees covered under the Act: The least of the following three amounts is exempt:
| Sl. | Condition | Amount |
|---|---|---|
| A | Actual gratuity received | As paid by employer |
| B | Rs. 20,00,000 | Statutory cap |
| C | (15 x Last drawn salary x Years of service) / 26 | Formula amount |
The least of A, B, and C is the exempt amount. The rest is taxable.
For non-covered employees: The least of the following three:
| Sl. | Condition | Amount |
|---|---|---|
| A | Actual gratuity received | As paid by employer |
| B | Rs. 20,00,000 | Statutory cap |
| C | (1/2 x Last 10 months’ average salary x Years of completed service) | Half-month formula |
How Gratuity Is Taxed for Private Sector
Take this example:
- Last drawn salary: Rs. 80,000 (basic + DA)
- Years of service: 15
- Actual gratuity received: Rs. 8,00,000
Calculation:
- Condition A: Rs. 8,00,000
- Condition B: Rs. 20,00,000
- Condition C: (15 x 80,000 x 15) / 26 = Rs. 6,92,308
Exempt amount = least of (8,00,000 / 20,00,000 / 6,92,308) = Rs. 6,92,308
Taxable gratuity = Rs. 8,00,000 - Rs. 6,92,308 = Rs. 1,07,692
The taxable portion is added to the employee’s income and taxed at their applicable slab rate.
How EasyHR Automates Gratuity Calculation
Manually computing gratuity for every departing employee is error-prone and time-consuming. EasyHR handles this as part of its statutory compliance module and payroll features, auto-computing the correct formula based on establishment type, tracking eligibility as employees approach 5 years of service, and flagging when the Rs. 20 lakh cap is near. Monthly provisions appear on the salary slip, and reports are available for audit.
Stop calculating gratuity manually. Start your free trial
Frequently Asked Questions
Is gratuity calculated on basic salary or CTC?
Gratuity is calculated on basic salary + dearness allowance (DA) only. It is not calculated on CTC, gross salary, HRA, or other allowances. If your salary structure does not include DA, then gratuity is computed on basic salary alone.
Can I get gratuity if I resign before 5 years?
No. Under the Payment of Gratuity Act, a minimum of 5 years of continuous service is required to claim gratuity on resignation. The only exceptions are death and permanent disability, where no minimum service period applies.
What is the maximum gratuity amount in India?
The maximum gratuity amount payable under the Payment of Gratuity Act is Rs. 20 lakh. This cap was raised from Rs. 10 lakh in 2018. Employers may pay more voluntarily (as ex-gratia), but the excess is taxable.
Is gratuity mandatory for companies with fewer than 10 employees?
The Payment of Gratuity Act does not apply to establishments with fewer than 10 employees. However, once an establishment has had 10 or more employees on any day in the preceding 12 months, it becomes covered — even if the count later drops below 10.
How is gratuity different from leave encashment?
Gratuity is a lump sum based on last drawn salary and years of service. Leave encashment is the payment for unused earned leave at the time of exit. They are calculated separately and have different tax rules.
This article is for informational purposes and does not constitute legal or tax advice. For compliance decisions specific to your organization, consult a qualified labour law advisor. Gratuity rules are subject to amendments — verify current thresholds before applying.
