Gratuity is a one-time payment your employer owes you for long service – and unlike a bonus, it’s governed by a fixed legal formula, not company discretion. Enter your last drawn salary and years of service to see exactly what you’re owed, and how much of it stays tax-free.
Years used in the formula follow the rounding rule: an extra period of 6 months or more in your final year of service rounds up to a full year, while less than 6 months is dropped. This calculator assumes your employer pays exactly the statutory formula amount – if you have a separate employment contract that promises a higher gratuity, use that actual figure to check the tax treatment instead.
Gratuity Calculation Formula in India
Under the Payment of Gratuity Act, 1972, the standard calculation is: last drawn salary (basic pay plus dearness allowance) multiplied by 15, multiplied by your completed years of service, divided by 26. The 26 represents the number of working days typically counted in a month under the Act, which is why the formula effectively pays you 15 days of salary for every year you’ve worked. Establishments not covered under the Act sometimes use 30 in place of 26, since they count all calendar days in a month rather than working days – this small change in the denominator noticeably lowers the payout for the same salary and years.
Two Different Rounding Rules – Don’t Mix Them Up
There are two separate places where “rounding” matters in a gratuity calculation, and confusing them is one of the most common mistakes people make.
Eligibility rounding: To even qualify for gratuity, you generally need 5 full years of continuous service. But the Supreme Court has held that if you’ve completed 4 years and worked 240 or more days in your fifth year, that counts as having completed 5 years for eligibility purposes. This specific rounding applies only to employees covered under the Act – if you’re not covered, a strict 5-year completion is usually required unless your employer’s own policy says otherwise.
Calculation rounding: Once you’re eligible, the number of years actually used inside the formula follows a different, simpler rule – any leftover period of 6 months or more rounds up to the next full year, and anything less than 6 months is ignored. Someone with 12 years and 7 months of service gets calculated as 13 years; someone with 12 years and 4 months gets calculated as 12 years.
How to Calculate Gratuity Using This Calculator
Enter your last drawn Basic plus DA – not your gross salary or full CTC, since allowances like HRA and special pay don’t count toward the formula. Enter your completed years and any extra months separately, then pick which employment category fits you. The category matters because it changes both the divisor used (26 versus 30) and how the tax exemption is worked out at the end. If you enter less than 5 years of service, a warning appears, since that generally means you aren’t eligible unless your case falls under the death or disablement exception.
Who Is Covered Under the Payment of Gratuity Act?
The Payment of Gratuity Act, 1972 applies to a wide range of establishments across India. Once an establishment comes under the Act, gratuity provisions generally continue to apply even if the employee count later falls below the threshold.
The Act typically covers the following types of establishments:
- Factories engaged in manufacturing activities
- Mines and oilfields
- Plantations
- Ports and railway companies
- Shops and commercial establishments employing 10 or more persons
- Educational institutions employing 10 or more persons
- Other establishments that have been notified by the Central Government or State Governments
If you work for an establishment covered by the Act, gratuity is generally payable after completing the required period of continuous service, subject to the conditions prescribed under the law. Employees working in organisations that are not covered may still receive gratuity if it is provided under their employment contract, company policy, or service rules.
Gratuity Tax Exemption Limit of ₹20 Lakh Explained
For private-sector employees, gratuity is tax-exempt under Section 10(10) of the Income Tax Act up to Rs 20 lakh – and this survives under both the old and new tax regime. What catches people off guard is that this limit is cumulative across your entire working life, not a fresh allowance at every job. If you’ve already used up Rs 12 lakh of exemption at a previous employer, only Rs 8 lakh of exemption remains available to you at your current one, regardless of how the formula works out here.
The Rs 20 lakh figure is also a hard ceiling on what your employer is legally obligated to pay under the Act itself – if the formula produces a higher number, the employer only has to pay Rs 20 lakh unless your contract specifically promises more. Any amount an employer voluntarily pays beyond the statutory formula is treated as an ex-gratia payment and is fully taxable, separate from the exemption calculation.
Government employees – central, state, and local authority – are treated differently: their gratuity is fully exempt from tax with no ceiling at all, reflecting their separate pension and retirement benefit framework outside the general Income Tax Act limits that apply to everyone else.
Gratuity Rules for Fixed-Term Employees
Under the Code on Social Security, 2020, which took effect on 21 November 2025, employees on fixed-term contracts no longer need to wait 5 years to become eligible for gratuity. A worker on even a 2-year fixed-term contract who completes just 1 year of service is now entitled to a proportionate, pro-rata gratuity payout for that year – a significant shift from the standard 5-year rule that still applies to regular, permanent employees.
Frequently Asked Questions (FAQs)
Ans. Gratuity is calculated only on your last drawn Basic Salary plus Dearness Allowance (DA). Other components such as HRA, special allowance, bonus, incentives, conveyance allowance, and employer PF contribution are not included. Using your gross salary or CTC can lead to an incorrect gratuity estimate.
Ans. In many cases, yes. Courts have held that employees covered under the Payment of Gratuity Act may be eligible if they have completed 4 years and 240 days of continuous service. Since 4 years and 7 months generally exceeds this requirement, many employees qualify. However, eligibility can depend on the nature of employment and the establishment involved.
Ans. The difference comes from the calculation formula. For employees covered under the Act, gratuity is calculated using 26 working days as the divisor. For employees not covered under the Act, employers generally use 30 calendar days. Because of this, employees covered under the Act usually receive a slightly higher gratuity amount for the same salary and service period.
Ans. Generally, gratuity becomes payable after completing 5 years of continuous service. However, this condition does not apply in cases of death or permanent disability. Fixed-term employees may also have different eligibility rules under the Code on Social Security.
Ans. No. The ₹20 lakh exemption under Section 10(10) of the Income Tax Act is a lifetime limit, not a separate limit for each employer. If you have already claimed gratuity exemption from a previous employer, that amount reduces the exemption available for future gratuity payments.
Ans. Under the Payment of Gratuity Act, employers are generally required to pay gratuity up to the applicable statutory limit unless a higher amount is provided under the employment contract or company policy. For income tax purposes, exemption is subject to the prescribed limits under Section 10(10), and any excess amount may become taxable depending on the employee category and applicable rules.
Ans. Yes. The gratuity exemption available under Section 10(10) continues to apply under both the old and the new tax regimes. Choosing the new tax regime does not affect the tax treatment of eligible gratuity received at retirement or resignation.
Ans. Gratuity received by Central Government, State Government, and local authority employees is generally fully exempt from income tax under Section 10(10). This exemption is different from the limits applicable to most private-sector employees.
Ans. No. Under the provisions relating to fixed-term employment, eligible fixed-term employees can receive pro-rata gratuity even if they have not completed 5 years of service, provided they satisfy the applicable conditions prescribed under labour laws.
Ans. If an employee satisfies the eligibility conditions under the law, resignation alone is not a valid reason to deny gratuity. Employers are required to process and pay eligible gratuity within the prescribed time limit, except in specific situations permitted under law.
Ans. Yes. Employees working in eligible private establishments covered under the Payment of Gratuity Act can receive gratuity after fulfilling the required service conditions. Many private companies also offer gratuity benefits through their employment policies.
Ans. In the event of an employee’s death, gratuity is paid to the nominee registered by the employee. If no nomination exists, the amount is paid to the legal heirs according to applicable rules. The 5-year service condition is not required in cases of death.
Tabassum is a government document researcher and writer with over 5 years of experience exclusively dedicated to tracking and simplifying Central and State Government document processes across India. She has researched and published detailed guides on 100+ government documents and certificates – including Aadhaar Card, PAN Card, Ration Card, Domicile Certificate, and Birth Certificate – covering all states and the Central Government, helping lakhs of Indian citizens successfully complete their paperwork in simple, easy-to-understand language.