Gratuity is a one-time lump sum paid by your employer when you leave after 5+ years of service. The formula is (last drawn basic + DA) × 15/26 × years of service. The 2018 amendment caps the tax-free amount at ₹20 lakh for non-government employees.
What is Gratuity?
The Payment of Gratuity Act, 1972 made gratuity a statutory right in India for employees of organisations with 10+ workers. It is essentially the company saying 'thank you for your years of service' in cash, paid at exit.
Eligibility starts after 5 completed years of continuous service. Death and permanent disability waive the 5-year minimum. The amount depends on your last drawn basic + DA and total years of service. Fractions over 6 months count as a full year.
Tax treatment: government employees get gratuity fully tax-free. Private-sector employees covered by the Act get tax exemption up to ₹20 lakh (2018 cap). Anything above that is taxable. The cap is lifetime — across all gratuity payments, not per employer.
The 15/26 formula
The Act considers 26 working days in a month. Gratuity is half a month's wages (15 of 26 days) per completed year. So a 10-year employee with ₹50,000 last basic gets the equivalent of 5 months' basic salary.
- Basic + DA
- Last drawn monthly—your final basic + dearness allowance per month
- Years
- Years of service—completed years; >6 months counts as full year
How to use this calculator
Two inputs: last drawn basic + DA and years of service.
Enter last drawn basic + DA
From your final salary slip, the basic + DA component (not the gross or take-home). This is the figure used in the Act, not full CTC.
Enter years of service
Completed years. If you served 7 years 8 months, count 8 (>6 months rounds up).
When you'd use this calculator
Job change decision
Are you about to leave at year 4? You forfeit gratuity. Year 5+ becomes meaningful.
Retirement corpus planning
Gratuity is often a substantial chunk at retirement (₹10-20 lakh). Factor it into your retirement projection.
VRS / layoff payouts
Gratuity is part of the standard severance. Verify your employer is paying the correct amount.
Tax planning at exit
If your gratuity exceeds ₹20 lakh, the excess is taxable at slab rate. Plan accordingly for the year of exit.
Common mistakes to avoid
Using full salary instead of basic + DA
Gratuity uses only basic + DA, not gross salary. Special allowance, HRA, etc., are not counted.
Counting partial year as full
Less than 6 months extra rounds DOWN; 6+ months rounds UP. Verify your service period precisely.
Assuming ₹20L cap is per employer
It is a lifetime cap across all gratuities you've ever received. Track this carefully if you have multiple long stints.
Glossary
- Gratuity
- Lump-sum employer payment after 5+ years of service, governed by the Payment of Gratuity Act, 1972.
- Continuous service
- Uninterrupted employment with one employer. Authorised leaves do not break continuity.
- Tax-free cap
- ₹20 lakh — the maximum tax-free gratuity for non-government employees, set in 2018.
Frequently asked questions
Who is eligible for gratuity in India?
Why 15/26 in the formula?
Is gratuity taxable?
References
- Payment of Gratuity Act, 1972— Ministry of Labour and Employment