Gratuity Calculation Explained: How Much Will You Get When You Leave a Job?

If you have spent five or more years with the same employer, you are owed a lump sum when you leave — whether you resign, retire or are let go. That payment is gratuity, and most salaried Indians either do not know how much they are owed or find out only at exit. This guide gives you the exact formula, the rounding rule that can add a full extra year to your payout, and the tax rules.

Who is eligible for gratuity?

Under the Payment of Gratuity Act, 1972, you are eligible if:

• You work for an establishment with 10 or more employees (shops, factories, companies — almost every formal employer is covered), and
• You have completed 5 years of continuous service with that employer.

The 5-year rule is waived in only two cases: death or disablement of the employee, where gratuity is payable regardless of service length.

The gratuity formula

For employees covered by the Act:

Gratuity = (15 ÷ 26) × Last drawn salary × Number of completed years of service

Where:

• Last drawn salary = your last drawn Basic + Dearness Allowance (DA) only. HRA, bonuses and other allowances do not count.
• 15 ÷ 26 = 15 days' wages out of 26 working days in a month, for each year of service.

The 6-month rounding rule (this matters a lot)

Service of more than 6 months in the final year is rounded up to a full year. So 10 years and 7 months counts as 11 years, while 10 years and 5 months counts as 10.

Verified worked examples

Example 1: Priya's last drawn Basic + DA is ₹60,000. She worked 10 years and 7 months → rounded to 11 years.

Gratuity = (15 ÷ 26) × ₹60,000 × 11 = ₹3,80,769

Example 2: Arun's last drawn Basic + DA is ₹40,000. He worked exactly 6 years.

Gratuity = (15 ÷ 26) × ₹40,000 × 6 = ₹1,38,462

Example 3: Meena's last drawn Basic + DA is ₹1,00,000. She worked 21 years.

Gratuity = (15 ÷ 26) × ₹1,00,000 × 21 = ₹12,11,538

You can check these yourself: multiply the salary by 15, divide by 26, multiply by the years.

What if your employer is NOT covered by the Act?

A few very small establishments fall outside the Act. There, gratuity (if the employer pays it voluntarily) uses a different formula: (15 ÷ 30) × last drawn salary × years — half a month's salary per year on a 30-day month, which works out lower.

Tax on gratuity: the ₹20 lakh rule

For private-sector employees covered by the Act, gratuity is tax-free up to ₹20 lakh (lifetime limit, across all employers). Anything above ₹20 lakh is added to your income and taxed at your slab rate. Government employees' gratuity is fully tax-exempt.

Two catches:

• The ₹20 lakh exemption is a lifetime limit — if you used ₹8 lakh of it at a previous job, only ₹12 lakh remains.
• Only the least of (actual gratuity received, formula amount, ₹20 lakh) is exempt — your employer cannot inflate the payout to dodge tax.

When and how is it paid?

• Gratuity is payable within 30 days of it becoming due. Delays attract interest payable by the employer.
• Apply to your employer in writing (Form I is the standard application). Most companies process it with your full-and-final settlement.
• An employer can forfeit gratuity only in narrow cases — termination for riotous conduct, moral turpitude offences, or wilful damage — and only to the extent of the damage or as ordered.

Smart things to do with your gratuity

A gratuity cheque often arrives at a career break — exactly when it is tempting to spend it. Consider:

FAQs

Is gratuity payable if I resign before 5 years?

No — under the Act, 5 years of continuous service is mandatory for resignation or retirement. The only exceptions are death or disablement. Some courts have treated 4 years and 240 days as sufficient in specific cases, but do not count on it; check your employment contract, as some companies offer more generous terms than the Act.

Is gratuity calculated on CTC or basic salary?

Only on last drawn Basic + DA — not CTC, not gross salary. This is why two people with the same CTC can receive very different gratuity amounts.

Can my employer refuse to pay gratuity?

Not if you are eligible under the Act. Forfeiture is allowed only for termination due to misconduct, violence or moral turpitude, and even then only partially in most cases. If an eligible employer refuses, you can approach the controlling authority under the Act (usually the labour commissioner's office).

Is gratuity the same as PF?

No. EPF is a monthly contributory scheme where both you and your employer deposit money into your account. Gratuity is entirely employer-funded and paid as a lump sum at exit. You can receive both.

Does the ₹20 lakh tax-free limit apply per job?

No — it is a lifetime limit across all employers. Keep records of gratuity received (and exemption claimed) from every past job.

Disclaimer: This article is for education only and is not legal, tax or investment advice. Gratuity rules are governed by the Payment of Gratuity Act, 1972 and Income-tax Act provisions as amended; verify current limits before acting. Figures verified as of October 2026.