🤝 Gratuity Calculator

Last updated: March 17, 2026

🤝 Gratuity Calculator

Compute payable gratuity under the Payment of Gratuity Act, 1972 (15/26 formula)

Include Dearness Allowance (DA) if any
Beyond full years (0–11)

How Gratuity Works — and How to Calculate Exactly What You're Owed

Most employees know gratuity exists somewhere in their offer letter, buried under CTC breakdowns, but few actually understand how the number gets computed. That gap costs people money. This guide walks through the real mechanics — the formula, the rounding rules, the ₹20 lakh ceiling, and the specific differences between retiring and resigning — so you know your entitlement before your last working day.

The Legal Foundation: Payment of Gratuity Act, 1972

Gratuity in India is governed by the Payment of Gratuity Act, 1972, which applies to any establishment employing 10 or more people (once the threshold is crossed, it stays covered even if headcount later dips). The Act mandates a lump-sum payment to an employee as a reward for long service. It is not a bonus, not a provident fund contribution — it is a statutory right earned over time, payable on separation.

The formula is deceptively simple: (Last drawn Basic Salary + Dearness Allowance) × 15 × Completed Years of Service ÷ 26. The number 26 represents the working days in a month (excluding four Sundays), and 15 represents the 15 days' wages per year of service that the law mandates. Every variable in this formula carries specific legal meaning, which is where most confusion arises.

What Counts as "Basic + DA"?

Only basic salary and dearness allowance feed into the gratuity formula. HRA, special allowances, conveyance, medical reimbursement, performance bonuses — none of these count. This is why companies with inflated special allowance structures tend to result in lower gratuity payouts than their headline CTCs suggest.

For employees in the private sector where DA is zero (common in IT and startup jobs), only the basic salary is used. If your CTC shows ₹12 lakhs per year with a basic of ₹3.5 lakhs annually, your monthly basic for the gratuity formula is ₹29,167 — not the gross figure, not the CTC divided by 12.

The 5-Year Eligibility Rule — and Its Critical Exceptions

Here is where many employees and even some HR departments get confused. The general rule is that you must have completed at least five years of continuous service to be eligible for gratuity under resignation or retirement. Clock in at 4 years and 11 months and quit voluntarily? Statutorily, nothing is owed.

But there are two major exceptions that flip this rule entirely:

Death or permanent disability: If an employee dies or suffers a permanent disability during service, gratuity becomes payable regardless of how long they served. One year of service, two months — it doesn't matter. The amount is calculated on actual service rendered, with the same 15/26 formula.

Retrenchment: When an employer terminates employment due to business reasons (layoffs, closure, redundancy), the 5-year minimum does not apply. The Act protects employees from bearing the cost of the employer's business decisions.

The 6-Month Rounding Rule — Read This Carefully

The Supreme Court of India, in various judgments interpreting the Act, established that when calculating completed years of service, if an employee has worked more than 6 months beyond the last full year, the service is rounded up to the next complete year.

Concretely: if you have served 7 years and 8 months, the effective years used in the formula become 8 years, not 7. If you have served 7 years and 4 months, only 7 years count. This rounding can make a material difference — on a ₹50,000/month basic, one extra year rounds to ₹28,846 additional gratuity.

This rounding applies for regular retirement and resignation. For death and disability cases, actual service in fractional form is used by some courts, though the 6-month rounding is still widely applied in practice.

The ₹20 Lakh Ceiling

As of the 2010 amendment to the Payment of Gratuity Act (subsequently raised from ₹3.5 lakh → ₹10 lakh → ₹20 lakh), the maximum gratuity payable under the Act is capped at ₹20,00,000. Any amount computed by the 15/26 formula above this ceiling is not mandatorily payable — though employers can voluntarily pay more (and many large corporates do, calling it "ex-gratia" for the excess portion).

At what salary level does the cap kick in? Working backwards: ₹20,00,000 = (Basic + DA) × 15 × Years ÷ 26. For someone with 30 years of service, the formula equals (Basic) × 450 ÷ 26 = (Basic) × 17.31. That means basic above ₹1,15,540/month will hit the cap at 30 years of service. Senior executives routinely hit this ceiling long before retirement.

Tax Treatment of Gratuity

The tax rules differ by employer type. For government employees (central, state, defence), the entire gratuity received is exempt from income tax, with no upper limit. For private-sector employees covered under the Payment of Gratuity Act, the exemption is the least of three amounts: (a) actual gratuity received, (b) ₹20 lakh, or (c) the amount computed by the 15/26 formula. In practice, for most employees, the formula amount equals the actual amount, so the effective exemption is simply the lower of received amount and ₹20 lakh.

For private employees NOT covered by the Act (some smaller establishments), the formula changes to 15/30 instead of 15/26, and the tax calculation method differs slightly. Always confirm which formula your employer applies.

Worked Examples to Lock in the Math

Example 1 — Mid-career resignation: Rahul leaves after 9 years and 7 months. Basic + DA = ₹42,000/month. Since he has 7 months beyond his last full year (≥ 6), effective years = 10. Gratuity = ₹42,000 × 15 × 10 ÷ 26 = ₹2,42,307.69 ≈ ₹2,42,308. Well under the cap. Fully tax-exempt.

Example 2 — Long-serving senior employee hitting the cap: Meera retires after 32 years and 3 months. Basic + DA = ₹1,20,000/month. Effective years = 32 (only 3 months, less than 6, so no rounding). Raw gratuity = ₹1,20,000 × 15 × 32 ÷ 26 = ₹22,15,384. This exceeds ₹20 lakh, so payable gratuity = ₹20,00,000. The ₹2,15,384 excess is the employer's discretion.

Example 3 — Death before 5 years: An employee passes away after 3 years and 2 months. Basic = ₹28,000. Effective years = 3 (2 months < 6). Gratuity payable to nominee = ₹28,000 × 15 × 3 ÷ 26 = ₹48,461. No 5-year eligibility applies.

When Must the Employer Pay?

The employer must pay gratuity within 30 days of it becoming due. If payment is delayed without justification, the employer must pay simple interest at the rate prescribed by the government (currently 10% per annum) from the due date. You can file a claim with the Controlling Authority (typically the Labour Commissioner) if payment is refused or delayed. The limitation period for filing a claim is typically one year from the date it became due, though this can be condoned for sufficient cause.

Understanding these details changes your negotiating position. Whether you are approaching retirement, planning a job switch after many years at the same company, or processing payroll for employees — the formula is the same. The variables that shift are eligibility, rounding, and whether the ceiling applies. Get those right, and the number computes cleanly every time.

FAQ

Is gratuity payable if I resign after exactly 4 years and 8 months?
No. For resignation and retirement, the Payment of Gratuity Act requires a minimum of 5 continuous years of service. Since 4 years 8 months falls short of that threshold, statutory gratuity is not payable. Your employer may choose to pay an ex-gratia amount voluntarily, but they are not legally obligated to do so. The 5-year rule does not apply if you are retrenched or face death/permanent disability.
Why does the formula divide by 26, not 30 or 31?
The number 26 represents the average number of working days in a month under the Act, calculated by subtracting four Sundays from a 30-day month. The law conceptually pays 15 days of wages per year of service, and since a 'month' is treated as 26 working days, the formula becomes (monthly salary × 15 × years) ÷ 26. Some non-Act employers use 30 as the denominator, resulting in a slightly lower payout — always check which formula applies to your establishment.
Does the ₹20 lakh gratuity cap apply to government employees?
The ₹20 lakh cap under the Payment of Gratuity Act applies to private-sector employees covered by the Act. Central government employees follow the CCS (Pension) Rules, which have their own gratuity provisions — their ceiling has also been revised to ₹20 lakh as of 2016, but the formula and eligibility rules differ slightly. State government rules vary by state. For government employees, the entire gratuity is fully exempt from income tax regardless of amount.
If I have worked 6 years and 6 months exactly, does it round up to 7 years?
Yes. The Supreme Court's interpretation of the Act holds that if the remainder months after the last complete year are 6 or more, the service rounds up to the next full year. So 6 years and 6 months is treated as 7 years in the formula. If the extra period were 5 months, only 6 years would count. This rounding rule applies to resignation and retirement — for death/disability cases, the exact service is typically used, though practice varies by employer.
Does HRA or performance bonus affect my gratuity amount?
No. The gratuity formula uses only the last drawn Basic Salary and Dearness Allowance (DA). House Rent Allowance, special allowance, conveyance allowance, LTA, medical reimbursement, and performance bonuses are all excluded. This is a common source of disappointment for employees with high gross salaries but low basic components — their gratuity is calculated on a much smaller base. If your basic is a low fraction of your CTC, your gratuity will be proportionally lower too.
What if my employer refuses to pay gratuity?
If your employer refuses or delays gratuity payment without valid reason, you can file a complaint with the Controlling Authority under the Payment of Gratuity Act — usually the Assistant Labour Commissioner or Labour Commissioner in your district. The employer must pay the gratuity within 30 days of it falling due, failing which simple interest (currently 10% per annum) accrues on the outstanding amount. The limitation period to file a claim is generally one year from the due date, extendable for sufficient cause shown.