Gratuity is a lump sum your employer pays you as a thank-you for long service, and for most salaried employees in India it is governed by the Payment of Gratuity Act, 1972. The amount is not arbitrary - it follows a fixed statutory formula built around a curious "15 days for every year" rule and a 26-day month. This guide explains where that formula comes from, who qualifies, how part-years are rounded, how much of the payout is tax-free, and walks through a worked example you can reproduce in the Gratuity Calculator.
Who is eligible for gratuity
The Payment of Gratuity Act applies to factories, mines, shops and establishments that employ 10 or more people. If you work for such an employer, you become eligible for gratuity after completing five years of continuous service with the same organisation. The five-year condition is waived only if service ends because of the employee's death or disablement - in those cases gratuity is payable regardless of tenure. Gratuity is triggered by resignation, retirement, superannuation, death or disablement; it is not paid while you simply continue working.
The 15/26 formula
For employees covered by the Act, gratuity is calculated as:
- Gratuity = (15 × last drawn salary × completed years of service) / 26
Here "last drawn salary" means your last monthly Basic pay plus Dearness Allowance (DA) - not gross salary, and not CTC. Allowances such as HRA, bonuses and reimbursements are excluded. The formula credits you 15 days of wages for every completed year of service, and it divides by 26 rather than 30 because a working month under the Act is treated as 26 days: the four Sundays are excluded as paid weekly off-days. So one day's wage equals monthly Basic+DA ÷ 26, and 15 such days are paid per year of service.
How part-years are rounded
Service is counted in completed years, with the final part-year rounded to the nearest whole year using a six-month rule. If the leftover months in your last year exceed six, the year rounds up; if they are six months or fewer, the year is dropped. So 12 years 8 months counts as 13 years, while 12 years 4 months counts as 12 years. This single rounding step can swing the payout by a full year's worth of gratuity, which is why the exact months of service matter near a year boundary.
A worked example
Suppose Ravi resigns after 12 years and 8 months of service, with a last drawn Basic + DA of 60,000 a month. First, round the service: 8 months is more than six, so it becomes 13 completed years. Then apply the formula:
- One day's wage = 60,000 ÷ 26 = 2,307.69.
- 15 days per year = 15 × 2,307.69 = 34,615.38.
- Gratuity = 34,615.38 × 13 years = 4,50,000.
So Ravi receives 4,50,000. Had he left just four months earlier, at 12 years 4 months, the service would round down to 12 years and the gratuity would fall to about 4,15,385 - roughly 34,600 less for the same job. You can test both scenarios instantly in the Gratuity Calculator by entering Basic+DA and the exact years and months of service.
How much gratuity is tax-free
Gratuity enjoys a generous tax exemption under Section 10(10) of the Income Tax Act. For employees covered by the Payment of Gratuity Act, the exempt amount is the least of three figures: the actual gratuity received, the amount given by the 15/26 formula, and a lifetime ceiling of 20,00,000. Because the formula amount is itself one of the three limits, gratuity calculated strictly by the formula is fully exempt up to that 20 lakh cap. Ravi's 4,50,000 is therefore entirely tax-free. Anything an employer pays over and above the formula (ex-gratia gratuity) or beyond the 20 lakh lifetime limit is taxable as salary income.
Employees not covered by the Act
A minority of employees work for establishments outside the Act's scope. For them, gratuity is often computed as (15 × average last 10 months' salary × completed years) / 30 - note the divisor of 30 instead of 26, and no rounding up of the final part-year. The tax exemption rules also differ slightly. The Gratuity Calculator models the far more common covered-employee case using the 15/26 formula, so if your employer is outside the Act, treat the figure as an approximation and confirm your entitlement with HR.
Where gratuity fits in your pay
Employers frequently show a gratuity provision - about 4.81% of Basic per year - inside your CTC, even though you only receive it after five years. That is one reason your take-home pay is well below your headline CTC; our In-Hand Salary Calculator and its guide break down where the rest goes. When you do receive gratuity, it is a meaningful lump sum, so it is worth planning what to do with it - parking it in an FD or investing it. Run your own numbers through the Gratuity Calculator as you approach a service milestone so you know roughly what to expect.
Frequently asked questions
- Why is gratuity divided by 26 and not 30?
- Under the Payment of Gratuity Act a working month is treated as 26 days, because the four Sundays are excluded as paid weekly off-days. So one day's wage is the monthly Basic+DA divided by 26, and 15 such days are credited for every completed year of service, giving the (15 × salary × years) / 26 formula.
- Do I get gratuity if I leave before five years?
- Generally no. You must complete five years of continuous service with the same employer to be eligible under the Act. The only exceptions are when service ends due to the employee's death or disablement, in which case gratuity is payable regardless of how long they had worked.
- Is gratuity taxable?
- For employees covered by the Payment of Gratuity Act, gratuity is exempt up to the least of the actual amount received, the amount given by the 15/26 formula, and a lifetime limit of 20,00,000. Gratuity paid strictly by the formula is therefore fully tax-free up to that ceiling; any amount paid above the formula or beyond 20 lakh is taxed as salary.