How to Calculate Gratuity in India: Formula and Worked Examples
Gratuity is a lump sum your employer pays you as a thank-you for long service. It is not a deduction from your salary — it is an extra benefit you earn simply by staying with the same organisation for several years. Many employees only discover it exists when they resign or retire, and even then few know how the amount is worked out. Understanding the formula helps you check that you are being paid the right figure and plan around it.
Who is eligible for gratuity
Under the Payment of Gratuity Act, gratuity becomes payable once you have completed at least five years of continuous service with the same employer. The five-year rule is waived if service ends because of death or disablement. It applies to establishments with ten or more employees, covering most private companies, factories and shops. A common point of confusion is the final year: if you have worked more than six months beyond a completed year, it counts as a full year for the calculation.
The gratuity formula
For employees covered by the Act, gratuity = (last drawn salary × 15 × years of service) ÷ 26. Here 'salary' means your basic pay plus dearness allowance, the 15 represents 15 days of wages for each completed year, and 26 is the number of working days assumed in a month. The figure of 26 (rather than 30) makes the per-day wage slightly higher, which works in your favour.
A worked example
Suppose your last drawn basic plus DA is ₹50,000 a month and you have worked for 10 years and 7 months. Because 7 months rounds up, the service counts as 11 years. Gratuity = (₹50,000 × 15 × 11) ÷ 26 = ₹82,50,000 ÷ 26 ≈ ₹3,17,308. Had the same person left at exactly 10 years and 5 months, the months would round down to 10 years, giving (₹50,000 × 15 × 10) ÷ 26 ≈ ₹2,88,462 — a difference of nearly ₹29,000 driven entirely by a couple of months.
The tax-free limit
Gratuity is one of the more tax-friendly payments you can receive. For employees covered by the Act, the amount is exempt from income tax up to a ceiling, with anything above that ceiling taxed as part of your income. The exemption is the lowest of three figures: the actual gratuity received, the amount calculated by the formula, or the statutory upper limit. Government employees generally receive their gratuity fully tax-free.
- Covered by the Act: divide by 26 and use 15 days' wages per year.
- Not covered by the Act: the formula uses 30 days a month instead of 26, and rounds part-years down rather than up.
- Death or disablement: the five-year minimum does not apply.
- Tax exemption: capped at the statutory limit; excess is taxable.
Common mistakes to avoid
The biggest error is using your full take-home or CTC salary in the formula. Gratuity is calculated only on basic pay plus dearness allowance, not on allowances, bonuses or your gross package, so plugging in the larger number gives an inflated result. Another frequent slip is miscounting service: only completed years count, with the part-year rounding rule applied to the final stretch. Finally, some employees assume gratuity is automatic on any exit, but the five-year threshold means leaving at four years and eleven months usually means receiving nothing.
Frequently asked questions
Do I get gratuity if I resign before five years?
Generally no. Five years of continuous service is the minimum, and the only exceptions are exit due to death or disablement. Resigning even a few months short usually means no gratuity is payable.
Is gratuity deducted from my salary?
No. It is funded by the employer as an additional retirement benefit, not taken out of your monthly pay. What you see in your payslip is unaffected.
Does the seven-month rounding always apply?
For employees covered by the Act, more than six months in the final year rounds up to a full year, while six months or fewer rounds down. If you are not covered by the Act, part-years are typically rounded down regardless.
The bottom line
Gratuity rewards loyalty with a lump sum built from one simple formula: fifteen days of basic-plus-DA wages for every completed year, divided by 26. Cross the five-year line, count your service carefully, and remember the tax exemption before you spend it. Run your own figures through our gratuity calculator so you know exactly what to expect when you move on.