Gratuity Calculator: Formula, Rules & Tax Exemption [2026]

Gratuity is a lump sum payment made by an employer to an employee as a token of appreciation for long and meritorious service. It is a statutory right under the Payment of Gratuity Act, 1972, and is one of the most important components of your retirement or separation benefits. Understanding how gratuity is calculated, the eligibility criteria, and the tax implications can help you plan your finances better. In this comprehensive guide, we explain everything you need to know about gratuity in India.

What is Gratuity?

Gratuity is a monetary benefit paid by an employer to an employee who has completed at least 5 years of continuous service. It is paid upon retirement, resignation, termination, disablement, or death. The Payment of Gratuity Act, 1972 governs gratuity for establishments with 10 or more employees.

Here are the key features of gratuity:

• Who pays: The employer pays the entire gratuity amount. There is no employee contribution.
• Applicability: The Payment of Gratuity Act applies to factories, mines, oilfields, ports, railways, shops, and establishments employing 10 or more persons. Even if an establishment falls below 10 employees after the Act applies, it continues to be covered.
• Gratuity fund: Many employers set up a Gratuity Fund with an insurance company (like LIC) to fund the gratuity liability. This ensures timely payment even if the company faces financial difficulty.
• Maximum limit: Under the Act, the maximum gratuity payable is ₹20 lakh. However, employers can voluntarily pay more than ₹20 lakh — the tax exemption is capped at ₹20 lakh.
• Nomination: Employees can nominate a family member to receive gratuity in case of death during service.

Gratuity is a significant financial benefit, especially for long-tenured employees. An employee with 20+ years of service and a decent salary can receive several lakhs as gratuity, making it one of the largest lump sum payments during their career.

Gratuity Formula Explained

The gratuity calculation depends on whether your employer is covered under the Payment of Gratuity Act or not. Two different formulas apply:

Formula for Employers Covered Under the Act (15/26)

If your employer is covered under the Payment of Gratuity Act (most employers with 10+ employees), the formula is:

Gratuity = (15 × Last Drawn Salary × Years of Service) / 26

Where:

• Last Drawn Salary = Basic Salary + Dearness Allowance (DA). Does not include HRA, special allowance, bonuses, or other components.
• Years of Service = Total completed years of service. If you have worked for more than 6 months in the last year, it is rounded up to the next full year. If less than 6 months, it is ignored.
• 15 = 15 days of salary (the Act considers 15 days as the gratuity entitlement per year).
• 26 = Number of working days in a month (the Act assumes 26 working days per month, not 30).

Worked Example (Under the Act)

Let us calculate gratuity for an employee with Basic + DA = ₹50,000 and 20 years and 8 months of service:

The employee receives approximately ₹6,05,769 as gratuity. If the same employee had 6 months and 5 days of service in the last year (less than 6 months), it would be calculated as 20 years, giving ₹5,76,923.

Formula for Employers NOT Covered Under the Act (15/30)

If your employer is not covered under the Act (fewer than 10 employees or specific exempted categories), the formula is different:

Gratuity = (15 × Last Drawn Salary × Years of Service) / 30

The only difference is the denominator: 30 days (calendar days) instead of 26 working days. This results in a lower gratuity amount. Additionally, the rounding rule may differ — some employers round up only after 1 year of additional service, not 6 months.

Comparison: 15/26 vs 15/30

Feature	15/26 (Under Act)	15/30 (Not Under Act)
Applicable to	Employers with 10+ employees	Employers with fewer than 10 employees
Days in month	26 (working days)	30 (calendar days)
Rounding rule	>6 months rounds up	Varies by employer policy
Gratuity amount (₹50K salary, 20 yrs)	₹5,76,923	₹5,00,000

The 15/26 formula is more favorable to employees. Always check whether your employer is covered under the Payment of Gratuity Act to know which formula applies to you.

Eligibility — The 5-Year Rule

To be eligible for gratuity, you must have completed at least 5 years of continuous service with the employer. However, there are important exceptions:

• Death or disablement: The 5-year rule is waived if the employee dies or becomes disabled due to an accident or disease. Gratuity is paid to the nominee or the employee regardless of the tenure.
• Termination: If the employer terminates the employee for reasons other than misconduct, gratuity is payable even if 5 years have not been completed (this is a grey area and depends on judicial interpretation).
• Seasonal employees: For seasonal establishments, the eligibility period may be shorter as specified by the Act.

Continuous service includes periods of leave, lay-off, strike (not due to employee fault), and lock-out. Breaks in service of up to 6 months in a year are treated as continuous service. If the break exceeds 6 months, that year is not counted.

Tax Exemption on Gratuity

Gratuity received by an employee is tax-exempt under Section 10(10) of the Income Tax Act, subject to limits. The exemption depends on whether you are a government employee or a private sector employee:

For Government Employees

Gratuity received by government employees (central, state, or local authority) is fully exempt from tax — there is no upper limit.

For Private Sector Employees (Covered Under the Act)

The tax-exempt amount is the least of the following three:

1. Actual gratuity received
2. ₹20,00,000 (the statutory limit)
3. 15 days' salary for each completed year of service (using the 15/26 formula)

Tax Exemption Calculation Example

The ₹1,94,231 excess above the exemption limit is added to your income and taxed at your applicable slab rate. If your employer pays exactly what the formula calculates (as required by the Act), the entire amount is usually tax-free.

For Private Sector Employees (NOT Covered Under the Act)

The tax-exempt amount is the least of:

1. Actual gratuity received
2. ₹20,00,000
3. Half month's salary (15/30) for each completed year of service

Note: The ₹20 lakh limit was increased from ₹10 lakh to ₹20 lakh in 2019 (retrospective from 2016). If you received gratuity before 2019, the old ₹10 lakh limit may apply.

Forfeiture Rules

An employer can forfeit (reduce or deny) gratuity in certain circumstances:

• Termination for disorderly conduct: If the employee is terminated for riotous or disorderly behavior or any act of violence on the employer's premises, gratuity can be forfeited to the extent of the damage caused.
• Termination for moral turpitude: If the employee is terminated for an offense involving moral turpitude (fraud, theft, sexual harassment, etc.), the entire gratuity can be forfeited.
• Resignation without notice: If the employee resigns without serving the notice period, the employer can deduct the notice period shortfall from the gratuity amount, but cannot forfeit the entire gratuity.

It is important to note that forfeiture is a serious action and is subject to legal scrutiny. Employees can challenge gratuity forfeiture in the Labour Court or appropriate authority under the Payment of Gratuity Act.

When to Expect Gratuity Payment

Under the Payment of Gratuity Act, the employer must pay gratuity within 30 days from the date it becomes payable (date of retirement, resignation, or other termination). Key points:

• Interest on delay: If the employer fails to pay within 30 days, they must pay interest from the date the gratuity became payable until the date of actual payment. The interest rate is notified by the government.
• Application for gratuity: The employee (or nominee) must apply for gratuity in the prescribed form. For retirement, the application is usually initiated by the employer. For resignation, you may need to apply yourself.
• Processing time: Most employers process gratuity along with the full and final settlement, which typically takes 30-45 days after the last working day.
• Gratuity certificate: After payment, the employer provides a gratuity certificate showing the amount paid, which is useful for tax filing and record-keeping.