You are about to resign after 6 years and someone mentions "you will get gratuity." But how much exactly? Most employees have no idea — they just hope HR calculates it correctly. Spoiler: HR sometimes gets it wrong too, especially on what counts as "last drawn salary."
This guide breaks down the gratuity calculation formula that every Indian employee should know. We cover the exact math, eligibility rules (the 5-year myth has exceptions), the ₹20 lakh tax-free limit, and what happens when your company shuts down or you are terminated. Knowing your gratuity number before you resign gives you real negotiating power.
Calculate Your Gratuity — Exact Amount
Enter Basic + DA and years of service. See tax-free and taxable portions.
Gratuity Formula — The Exact Calculation
For employees covered under the Payment of Gratuity Act, 1972:
Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 26Where:
- Last Drawn Salary = Basic Pay + Dearness Allowance (DA)
- 15 = 15 days wages for each year of service
- 26 = Working days in a month (not 30)
- Years of Service = Rounded to nearest year (4 years 7 months = 5 years)
Example
Basic + DA = ₹50,000/month. Service = 8 years.
Gratuity = (50,000 × 15 × 8) ÷ 26 = ₹2,30,769Important: The divisor is 26, not 30. This is because the Act uses 26 working days per month. Using 30 would give you a lower amount — and some companies incorrectly use 30.
Gratuity Eligibility — Who Qualifies?
| Condition | Eligible? | Notes |
|---|---|---|
| 5+ years in same company | Yes | Standard rule |
| 4 years 6 months+ | Yes | Rounded up to 5 years |
| Less than 5 years | No* | *Exception: death or disability — no minimum |
| Company has 10+ employees | Yes | Gratuity Act applies |
| Company has <10 employees | Maybe | Not mandatory but employer can still pay |
| Terminated for misconduct | Partial | Forfeited only for the specific misconduct-related period |
| Fixed-term contract | Yes | After completing contract or 5 years |
The rounding rule most people miss: If you have worked 4 years and 7 months, it rounds up to 5 years and you ARE eligible. But 4 years and 5 months rounds down to 4 years and you are NOT eligible. This is why some people wait an extra month before resigning.
Gratuity Tax Rules — How Much Is Tax-Free?
| Employee Type | Tax-Free Limit |
|---|---|
| Government employees | Entire gratuity is tax-free |
| Private employees (covered under Act) | Least of: ₹20 lakh, actual gratuity, or formula amount |
| Private employees (not covered) | Least of: ₹20 lakh, half-month salary × years, or actual amount |
For most private employees: Gratuity up to ₹20 lakh is tax-free. If your gratuity exceeds ₹20 lakh, only the excess is taxable at your income tax slab rate. The ₹20 lakh limit was increased from ₹10 lakh in 2019 — a significant benefit for long-serving employees.
Multiple employers
The ₹20 lakh exemption is cumulative across your career. If you received ₹12 lakh from Employer A, you have only ₹8 lakh exemption left for Employer B.
Common Gratuity Issues and Your Rights
- Company refuses to pay: File a complaint with the Controlling Authority (usually the Labour Commissioner). Companies face penalties and interest for delayed payment.
- "Basic salary" confusion: Many companies split salary into Basic, HRA, Special Allowance, etc. to keep Basic low. Gratuity is calculated ONLY on Basic + DA. If your Basic is ₹25,000 out of a ₹75,000 CTC, gratuity is on ₹25,000 — not ₹75,000.
- Company shut down: You are still entitled to gratuity. If the company cannot pay, the controlling authority can attach company assets. Insurance-backed gratuity trusts provide additional protection.
- Delay in payment: The employer must pay within 30 days of it becoming payable. After that, they owe simple interest at 10% per annum.
- Nomination: Always fill your gratuity nomination form (Form F). Without it, your family may face delays in receiving gratuity if something happens to you.
How to Maximize Your Gratuity
- Do not resign at 4 years 5 months: Wait until 4 years 7 months — that extra 2 months of service means the difference between ₹0 and your full gratuity amount.
- Negotiate higher Basic salary: Since gratuity is on Basic + DA only, a higher Basic means higher gratuity. Some companies offer flexible salary structures — opt for higher Basic if you plan long-term.
- Know the rounding rule: Years of service round to the nearest integer. 7 years 6 months becomes 8 years (8 years of gratuity instead of 7).
- Keep records: Save all salary slips showing Basic + DA. In disputes, you need proof of your last drawn salary. Do not rely on the company having accurate records after you leave.
How to Use the Tool (Step by Step)
- 1
Enter last drawn salary
Basic Pay + Dearness Allowance (not CTC).
- 2
Enter years of service
Total years and months in the company.
- 3
Select employee type
Private sector, government, or not covered under Act.
- 4
Get gratuity amount
See exact amount, tax-free portion, and taxable excess.
Frequently Asked Questions
How is gratuity calculated?+−
Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 26. Last Drawn Salary means Basic Pay + DA only — not your full CTC or take-home. The divisor is 26 (working days), not 30. This formula applies to employees covered under the Gratuity Act.
What is the minimum service for gratuity?+−
5 years of continuous service with the same employer. But here is what most people miss — 4 years and 6 months rounds up to 5 years, so you ARE eligible. 4 years and 5 months rounds down to 4 and you are not. The only exception is death or disability, where there is no minimum.
Is gratuity calculated on basic salary or CTC?+−
Only on Basic Pay + Dearness Allowance. This is why many companies keep Basic salary low (30-40% of CTC) — it reduces their gratuity liability. If your Basic is ₹30,000 out of ₹80,000 CTC, gratuity is calculated on ₹30,000.
How much gratuity is tax-free?+−
Up to ₹20 lakh for private employees (entire amount for government employees). This limit is cumulative across all employers in your career. Any gratuity above ₹20 lakh is taxed at your income tax slab rate.
Can my employer deny gratuity?+−
Not if you have completed 5 years. Gratuity is a statutory right under the Payment of Gratuity Act. If denied, file a complaint with the Labour Commissioner. The only exception is if you were terminated for proven misconduct involving violence or moral turpitude.
Is gratuity part of CTC?+−
Most companies include employer gratuity contribution in CTC, but you only receive it when you leave after 5 years. If you leave before 5 years, the company keeps it. Some employees call this "phantom CTC" because you never see it in your take-home.
What happens to gratuity if the company shuts down?+−
You are still legally entitled to it. If the company has a gratuity trust or insurance policy, the insurer pays. Otherwise, you can file a claim with the Labour Commissioner who can attach company assets. In practice, recovery can be slow in bankruptcy situations.
Do contract employees get gratuity?+−
Yes — fixed-term contract employees are eligible for gratuity after completing the contract or 5 years of continuous service, whichever comes first. This was clarified in the 2018 amendment. Many contract workers do not know this.
Calculate Your Gratuity — Exact Amount
Enter Basic + DA and years of service. See tax-free and taxable portions.
Calculate Gratuity →Related Guides
Salary Calculator India
Understand your CTC breakup, compare old vs new tax regimes, and calculate exact take-home salary.
EPF Calculator India — How to Calculate PF Balance, Interest & Maturity
Complete guide to Employee Provident Fund: contribution rates, interest calculation, and retirement corpus
Income Tax Calculator India 2025-26 — New vs Old Tax Regime
Complete guide to FY 2025-26 tax slabs, deductions, and which regime saves you more money.