What is Gratuity and Who is Eligible?
Gratuity is a lump-sum amount paid by an employer to an employee as a token of appreciation for the years of service rendered to the organization. It is governed by the Payment of Gratuity Act, 1972 in India and is one of the most searched retirement benefits among salaried employees.
To be eligible for gratuity, an employee must have completed at least 5 years of continuous service with the same employer (this condition is relaxed in case of death or disablement). Gratuity is payable at the time of resignation, retirement, termination, or death of the employee.
Free Gratuity Calculator
Use this free tool to instantly calculate your gratuity amount based on your last drawn salary and total years of service.
Gratuity Calculation Formula
The formula for calculating gratuity depends on whether the employee is covered under the Payment of Gratuity Act, 1972.
1. For Employees Covered Under the Act
Gratuity = (Last Drawn Salary × 15 × Number of Years of Service) ÷ 26
Here, “Last Drawn Salary” means Basic Salary + Dearness Allowance (DA). The number 26 represents the average working days in a month (excluding 4 Sundays), and 15 represents 15 days’ wages for each completed year of service.
2. For Employees Not Covered Under the Act
Gratuity = (Last Drawn Salary × 15 × Number of Years of Service) ÷ 30
In this case, 30 is taken as the number of days in a month, instead of 26.
Example Calculation
Suppose an employee has worked for 8 years in a company covered under the Gratuity Act, with a last drawn basic salary + DA of ₹40,000 per month.
Gratuity = (40,000 × 15 × 8) ÷ 26 = ₹1,84,615
This amount would be paid to the employee at the time of leaving the organization, subject to the maximum limit prescribed by law.
Maximum Gratuity Limit (2026)
As per the latest government notification, the maximum tax-free gratuity amount that an employee can receive is ₹20,00,000 (₹20 lakh). Any amount paid above this limit is treated as taxable income under “Income from Salary” and added to the employee’s total income for tax calculation.
Rounding Off Years of Service
While calculating gratuity, the number of years of service is rounded off based on the following rule:
- If the additional period of service is 6 months or more, it is rounded up to the next full year.
- If the additional period of service is less than 6 months, it is ignored.
For example, if an employee has worked for 8 years and 7 months, the gratuity will be calculated for 9 years. If the employee has worked for 8 years and 4 months, it will be calculated for 8 years only.
Is Gratuity Taxable?
The taxability of gratuity depends on the type of employer:
- Government Employees: Gratuity received is fully exempt from income tax.
- Private Sector Employees (covered under the Act): The least of the following three is exempt from tax — (a) Actual gratuity received, (b) ₹20,00,000, or (c) 15 days’ salary for each completed year of service.
- Private Sector Employees (not covered under the Act): The least of the following is exempt — (a) Actual gratuity received, (b) ₹20,00,000, or (c) Half-month’s average salary for each completed year of service.
Frequently Asked Questions (FAQs)
1. Can I get gratuity before completing 5 years?
Generally, no. A minimum of 5 years of continuous service is required, except in cases of death or disablement of the employee, where this condition does not apply.
2. Is gratuity calculated on basic salary only?
Yes, gratuity is calculated on the Basic Salary plus Dearness Allowance (DA) only. Other components like HRA, conveyance allowance, bonus, and special allowances are not included in the calculation.
3. What happens to gratuity if a company shuts down?
Even if a company shuts down or undergoes liquidation, gratuity is treated as a preferential payment and the employer is legally liable to pay it to eligible employees.
4. Can an employer refuse to pay gratuity?
An employer can forfeit gratuity (wholly or partially) only if the employee’s services were terminated due to proven misconduct, willful damage to property, or an act involving moral turpitude during employment.
5. How is gratuity different from a pension?
Gratuity is a one-time lump-sum payment made at the end of employment, whereas a pension is a recurring monthly payment made after retirement, usually based on a separate scheme like EPF/EPS.
Conclusion
Gratuity is an important financial benefit that rewards employees for their long-term service and loyalty to an organization. Use the free calculator above to get an instant estimate of your gratuity amount based on your salary and years of service. For exact figures, always refer to your company’s HR policy or consult a financial advisor, as some organizations may have more generous gratuity schemes than the statutory minimum.