Gratuity Calculation in India 2026: Formula, Rules & Eligibility

Last updated: May 2026. General information, not financial or legal advice.

Quick answer: Gratuity is a lump sum your employer pays you for long service, governed by the Payment of Gratuity Act, 1972. You’re eligible after 5 years of continuous service (with an important “4 years + 240 days” exception). Formula: (Last drawn basic + DA) × 15 ÷ 26 × years of service. Gratuity up to ₹20 lakh is tax-free for covered private-sector employees.

Gratuity is the most misunderstood component of Indian compensation. People assume it’s part of CTC they’ll never see, don’t realize they may qualify just under 5 years, and don’t know it’s largely tax-free. Here’s the complete, current picture.

What is gratuity?

Gratuity is a statutory lump-sum payment from an employer to an employee as a reward for long service, payable on exit (resignation, retirement, death, or disablement). It’s governed by the Payment of Gratuity Act, 1972, which applies to establishments with 10 or more employees.

It’s often shown as a line item in your CTC. It is real money you receive — but only if you meet the eligibility threshold.

Eligibility — the 5-year rule (and the exception that matters)

The headline rule: you must complete 5 years of continuous service with the same employer to be eligible for gratuity on resignation.

The exception almost nobody knows: the 5th year does not require a full 365 days. Courts (notably the Madras High Court interpretation widely followed) have held that 4 years + 240 days in the 5th year counts as “5 years” for gratuity eligibility. So if you’ve done 4 years and ~8 months, you may already be eligible.

Exceptions to the 5-year requirement entirely:

• Death or disablement — gratuity is payable regardless of length of service (paid to nominee in case of death).

The “continuous service” definition also has nuances (240 working days in a year counts as a full year for this purpose).

The gratuity formula

For employees covered under the Payment of Gratuity Act:

Gratuity = (Last drawn salary × 15 × years of service) ÷ 26

Where:

• Last drawn salary = last basic salary + dearness allowance (DA). It does not include HRA, bonuses, or other allowances.
• 15 = 15 days’ wages for each completed year
• 26 = number of working days in a month (the Act uses 26, treating 4 days as weekly off)
• Years of service = completed years; a part-year of more than 6 months rounds up to the next full year, 6 months or less rounds down

Worked examples

Example 1: Basic + DA = ₹50,000/month. Service = 7 years 8 months → rounds to 8 years. Gratuity = (50,000 × 15 × 8) ÷ 26 = ₹2,30,769

Example 2: Basic + DA = ₹80,000/month. Service = 5 years 4 months → rounds to 5 years. Gratuity = (80,000 × 15 × 5) ÷ 26 = ₹2,30,769

Example 3: Basic + DA = ₹1,20,000/month. Service = 12 years 7 months → rounds to 13 years. Gratuity = (1,20,000 × 15 × 13) ÷ 26 = ₹9,00,000

For employees not covered by the Act (rarer), a different formula applies: (Last drawn salary × 15 × years) ÷ 30, using average of last 10 months’ salary and no rounding-up of part years.

Is gratuity taxable?

Category	Tax treatment
Government employees	Fully exempt
Private-sector employees covered by the Act	Exempt up to ₹20 lakh (lifetime limit across employers); least of: ₹20L / actual gratuity / formula amount
Amount above the exemption limit	Taxable as salary

For the vast majority of private tech employees, gratuity received on a job switch after 5 years is entirely tax-free because it’s well under ₹20 lakh.

When is gratuity paid?

The employer must pay gratuity within 30 days of it becoming payable (i.e., from your last working day). Delay beyond 30 days attracts simple interest as per the Act. You typically submit Form I (application for gratuity) to the employer; the employer must respond and pay within the statutory window.

Common ways employees lose gratuity (avoid these)

• Resigning at 4 years 11 months without checking the 4-years-240-days rule — you may already be eligible; confirm before timing your exit.
• Breaks treated as discontinuous service — long unpaid breaks can interrupt “continuous service.” Understand how your absences are classified.
• Assuming it’s “just part of CTC” — it’s a real statutory payment; claim it via Form I on exit.
• Not nominating — file a gratuity nomination (Form F) so it’s protected for your family.

Frequently asked questions

What is the gratuity formula in India? (Last drawn basic + DA) × 15 × years of service ÷ 26, for employees covered by the Payment of Gratuity Act. Part-years over 6 months round up.

Is 5 years mandatory for gratuity? Generally yes, but “4 years + 240 days” in the 5th year is widely accepted as meeting the 5-year requirement. Death/disablement waives the 5-year rule entirely.

Is gratuity taxable in India? For covered private-sector employees, exempt up to ₹20 lakh lifetime. Amounts above that are taxable. Most tech employees’ gratuity is fully tax-free.

Is gratuity calculated on basic or gross salary? On last drawn basic + dearness allowance only. HRA, bonuses, and other allowances are excluded.

Can I get gratuity if I resign before 5 years? Not on a normal resignation before 5 years (subject to the 4y+240d interpretation). Death or disablement is an exception with no minimum service.

How long does the company have to pay gratuity? Within 30 days of it becoming payable. Delay attracts statutory interest.

Does part of a year count for gratuity? More than 6 months in the final year rounds up to a full year; 6 months or less rounds down (for covered employees).

Where to go from here

Before you time a resignation around year 5, calculate your exact eligibility using the 4-years-240-days rule — many people leave money on the table by exiting a few weeks too early.

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General information only, not legal/financial advice. The Payment of Gratuity Act and its interpretation have nuances — consult a qualified professional for your situation.