How Gratuity is Calculated in India

Gratuity is a lump-sum payment made by the employer to an employee in recognition of long service, payable on retirement, resignation (after 5+ years), death, or disablement. It is governed by the Payment of Gratuity Act 1972, which applies to establishments with 10 or more employees in factories, mines, oilfields, plantations, ports, railways, shops, and other notified establishments.

The standard formula under the Act is: Gratuity = (15 x last drawn monthly salary x completed years of service) / 26. "Last drawn salary" means Basic Salary plus Dearness Allowance (DA). The number 15 reflects 15 days of wages for each completed year, and 26 reflects the standard monthly working days (excluding 4 Sundays).

Eligibility Rules

• Minimum 5 years of continuous service with the same employer
• The 5-year requirement is waived in case of death or permanent disablement (paid to nominee/legal heir)
• A year of service is considered completed if more than 6 months were served in that final year (rounded up); less than 6 months is rounded down
• Applies to private sector employees; central and state government employees are governed by separate gratuity rules

Tax Treatment under Section 10(10)

Gratuity received is tax-exempt up to a ceiling. For private sector employees covered under the Act, the exempt amount is the minimum of three: actual gratuity received, the formula amount above, or Rs.20,00,000 (lifetime ceiling). The Rs.20 lakh ceiling has been the standard since 8 March 2019 (raised from Rs.10 lakh).

For employees not covered under the Act (smaller establishments), the formula uses 15 days of average salary of the last 10 months and divides by 30 (not 26), but the Rs.20 lakh ceiling still applies. Government employees receive fully tax-exempt gratuity. The Rs.20 lakh ceiling is cumulative across employers in a single financial year.

Worked Example

An employee with last drawn Basic + DA of Rs.60,000 per month and 12 years of service receives:

Gratuity = (15 x 60,000 x 12) / 26 = Rs.4,15,385. This entire amount is tax-exempt because it is below the Rs.20 lakh ceiling. If the same employee had served 35 years, the formula would yield Rs.12,11,538 - still fully exempt.

Sources & References

• Ministry of Labour and Employment - administering authority
• Payment of Gratuity Act 1972, Section 4 (eligibility and formula)
• Payment of Gratuity (Amendment) Act 2018 (raised the ceiling enabling Notification 16/2019)
• Income Tax Act 1961, Section 10(10) (tax exemption ceiling)
• Notification No. 16/2019 dated 8 March 2019 (Rs.20 lakh ceiling)

Last reviewed against Payment of Gratuity Act 1972 and Income Tax Act 2025 in April 2026. The Rs.20 lakh ceiling has been stable since March 2019; the 15/26 formula has been unchanged since the Act came into force.