The gratuity formula (Payment of Gratuity Act)
Gratuity is a statutory thank-you for long service — 15 days of wages for every completed year, where a month is counted as 26 working days:
Only basic + dearness allowance enters the formula — HRA, special allowance and bonuses do not. Service of 6 months or more in the final year rounds up to a full year: 12 years 7 months counts as 13 years; 12 years 5 months counts as 12.
Worked example
Suppose you resign after 12 years and 7 months with a final basic + DA of ₹60,000 a month. Service rounds up to 13 years, so gratuity = (15/26) × 60,000 × 13 = ₹4,50,000 — fully tax-free, since it is below the ₹20 lakh exemption cap.
Quick reference table
| Last basic + DA / month | 5 years | 10 years | 20 years |
|---|---|---|---|
| ₹30,000 | ₹86,538 | ₹1,73,077 | ₹3,46,154 |
| ₹50,000 | ₹1,44,231 | ₹2,88,462 | ₹5,76,923 |
| ₹1,00,000 | ₹2,88,462 | ₹5,76,923 | ₹11,53,846 |
Eligibility: the 5-year rule
Gratuity becomes payable on leaving a job — resignation, retirement or termination — after 5 years of continuous service with that employer. Two important softenings: courts have treated 4 years + 240 days in the fifth year as qualifying service in many rulings, and the 5-year condition is waived completely if employment ends due to death or disablement (gratuity then goes to the nominee).
Covered vs non-covered establishments
The Act covers establishments with 10 or more employees — which is almost every formal employer. For employees of non-covered establishments, the customary formula is slightly less generous: (15 ÷ 30) × average salary of the last 10 months × completed years, with no rounding up of partial years. This calculator uses the covered-establishment formula, which applies to the vast majority of private-sector employees.
How gratuity is taxed (FY 2025-26)
Government employees receive gratuity fully tax-free. For private-sector employees covered by the Act, the exemption is the least of: actual gratuity received, the 15/26 formula amount, and ₹20 lakh — a lifetime cap across all employers. Any amount above the exempt figure is added to your income and taxed at slab rate. The calculator flags the taxable portion automatically when you cross the cap.
Gratuity under the new labour codes
The Code on Social Security extends gratuity to fixed-term employees after just 1 year, on a pro-rata basis — a significant change for contract professionals. Separately, the wage-code definition of "wages" (basic + DA ≥ 50% of total pay) enlarges the gratuity base for anyone whose basic runs lower today. As of June 2026, implementation timelines vary by state and employer, so the 5-year Act rules above remain the operative law for most permanent employees.