What is Gratuity?
Gratuity is a lump sum payment made by an employer to an employee as a reward for long-term service. It is governed by the Payment of Gratuity Act, 1972 and applies to organisations with 10 or more employees across factories, mines, oilfields, plantations, ports, railway companies, and shops.
How is Gratuity Calculated?
Gratuity is calculated based on your last drawn Basic salary plus Dearness Allowance (DA) and total years of service.
Private Sector (Covered under Gratuity Act):
Gratuity = (Last Basic + DA) × 15/26 × Years of Service
Government / Non-covered employees:
Gratuity = (Last Basic + DA) × 15/30 × Years of Service
Note: If last year has more than 6 months, it counts as a full year
Gratuity Calculation Example
Suppose your last drawn Basic + DA is ₹60,000/month and you have worked for 8 years 7 months (rounds to 9 years) in a private company covered under the Act:
Gratuity = ₹60,000 × 15/26 × 9
= ₹60,000 × 0.5769 × 9
= ₹3,11,538
Tax exemption limit: ₹20,00,000
Taxable gratuity: ₹0 (well within limit)
Who is Eligible for Gratuity?
Any employee — permanent, contractual, or piece-rated — who has completed 5 years of continuous service is eligible for gratuity on resignation, retirement, superannuation, or termination. In case of death or disability, the nominee or employee receives gratuity even with less than 5 years of service.
Tax on Gratuity
For private sector employees, gratuity up to ₹20 lakh is completely tax-free. Amounts above ₹20 lakh are taxable as income. For government employees, the entire gratuity amount is exempt from income tax regardless of how much is received.
Benefits of Gratuity
Gratuity acts as a retirement safety net — the longer you stay with one employer, the larger the payout. It rewards loyalty and long service. Unlike PF, you don't contribute to gratuity — it's entirely funded by your employer. Knowing your gratuity entitlement helps plan retirement finances alongside PPF and NPS.
Related Calculators
Gratuity is one part of your retirement picture. Check your PPF Calculator for tax-free savings, our FIRE Calculator to plan early retirement, and the Salary Calculator to understand your full compensation including gratuity contribution.
Frequently Asked Questions
What is the minimum service required for gratuity? ⌄
5 years of continuous service with the same employer. However, in case of death or disability, the nominee receives gratuity even if service is less than 5 years. For calculation purposes, if the last year has more than 6 months, it is rounded up to a full year.
Is gratuity paid on resignation? ⌄
Yes, gratuity is payable on resignation, retirement, superannuation, or termination — as long as you have completed 5 continuous years of service. It must be paid within 30 days of leaving.
Why is 26 used instead of 30 in the gratuity formula? ⌄
For private sector employees covered under the Gratuity Act, 26 represents working days per month (30 days minus approximately 4 Sundays). This gives a slightly higher payout compared to the government formula which uses 30.
What is the maximum gratuity tax exemption? ⌄
₹20 lakh for private sector employees (revised from ₹10 lakh). Government employees receive full tax exemption on gratuity regardless of the amount received.
What is the difference between gratuity under the Gratuity Act vs non-covered employees? ⌄
Companies with 10 or more employees are covered under the Payment of Gratuity Act 1972 and use the formula: (Last Salary × 15 × Years) ÷ 26. Companies not covered may pay gratuity voluntarily using: (Last Salary × 15 × Years) ÷ 30 — which results in a slightly lower amount.
Can my employer deduct from gratuity? ⌄
Yes, in case of wilful damage, destruction of property, or termination due to misconduct. However, the employer must follow due process and cannot make arbitrary deductions. Normal resignation or retirement does not allow any deduction.