Gratuity is a lump-sum payment your employer owes you for long service — but it only kicks in after a minimum tenure, and the calculation has a rounding rule that surprises most people.
Who's eligible
Under the Payment of Gratuity Act, 1972, you're eligible after 5 or more years of continuous service with the same employer — except in cases of death or disability, where the 5-year requirement is waived entirely. The Act applies to any organization — factory, mine, plantation, shop, or establishment — with 10 or more employees.
The formula
For employees covered under the Act, gratuity is calculated as:
Gratuity = (Last drawn Basic + DA) × 15/26 × years of service
The 15/26 factor represents 15 days of wages for every completed year, based on a 26-day working month.
The rounding rule that changes your payout
Years of service aren't used as a fraction — the final partial year rounds upto a full year if it's 6 months or more, and drops entirely if it's less than 6 months. This single rule can change your payout significantly:
With a last-drawn Basic + DA of ₹45,000/month, 11 years and 4 months of service rounds down to 11 years, giving a gratuity of about ₹2,85,577. But 11 years and 7 months rounds up to 12 years, giving about ₹3,11,538 — nearly ₹26,000 more for just 3 extra months of service. Timing your exit around this 6-month boundary is worth being deliberate about.
The tax-exempt cap
Gratuity received is exempt from income tax up to a statutory cap, currently ₹20,00,000(last revised in 2024). Any amount above this cap is taxable as salary income. This cap is periodically revised by the government, so it's worth confirming the current limit if your calculated gratuity is close to it.
A note on non-covered employees
Employees at organizations not covered under the Act (rare, but possible for very small establishments) use a slightly different formula — 15/30 instead of 15/26, based on a 30-day month rather than the Act's 26-day working-month convention. The formula above applies to the far more common covered case.
Calculate your gratuity
Use the Gratuity Calculator to work out your exact payout, including the year-rounding rule and the statutory cap.