Gratuity Calculator
Calculate the gratuity amount payable on resignation, retirement or death under the Payment of Gratuity Act, 1972. Includes the Section 10(10) tax-exempt portion and the taxable balance. Updated for FY26.
Employers covered by the Payment of Gratuity Act, 1972 (10+ employees). Most private companies. Tax-exempt up to ₹20 lakh.
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What is gratuity?
Gratuity is a lump sum payment your employer makes when you part ways after long service, whether by resignation, retirement, death or disablement. Unlike EPF where you contribute every month, gratuity is fully funded by the employer; it does not show up in your salary slip and you do not see deductions for it. The amount comes out of an actuarially-funded liability the employer maintains, or in many cases an LIC-managed group gratuity scheme.
The Payment of Gratuity Act, 1972 made gratuity a statutory right for most organised-sector workers in India. The Act applies to factories, mines, oilfields, plantations, ports, railway companies, shops and "other establishments" with 10 or more employees on any day in the preceding 12 months. The Code on Social Security, 2020 subsumes the Act once notified but preserves the same formula and the same ₹20 lakh ceiling, so the math you do today carries over to the new regime.
How gratuity is calculated
The statutory formula for employees covered by the Act is:
Gratuity = (15 × last drawn salary × years of service) / 26
Where:
- Last drawn salary means basic salary plus dearness allowance only. HRA, bonus, allowances, perks and stock are excluded.
- Years of service is counted in completed years. Six months or more in the final year rounds up, less than six months is dropped.
- 26 represents working days in a month after excluding Sundays. The Act baked this in to slightly increase the per-day equivalent and therefore the total payout.
For employees in non-covered establishments (very small shops, certain trusts), the formula uses 30 instead of 26. That same denominator change cuts the payout by roughly 13% for an identical salary and tenure. The non-covered formula has no statutory backing, it is the convention courts have followed since the 1970s based on employment contract terms.
Worked example
You are leaving your current employer after 10 full years of continuous service. Last drawn basic plus DA is ₹50,000 per month, and the company falls under the Payment of Gratuity Act because it has 200 employees.
Plug it in: (15 × 50,000 × 10) / 26 = ₹2,88,461.54, which the employer typically rounds to ₹2,88,462. The full amount is under the ₹20 lakh ceiling, so it is fully exempt under Section 10(10)(ii). Zero tax on this payout.
Now push the salary to ₹2,00,000 and tenure to 25 years. Formula gives (15 × 2,00,000 × 25) / 26 = ₹28,84,615. The first ₹20 lakh is exempt; the remaining ₹8,84,615 gets added to your salary income in the year of receipt. For someone in the 30% slab plus 4% cess, that means an extra ₹2,75,800 in tax. Plan resignations and retirement timing around this if your gratuity is likely to cross the ceiling.
Common mistakes to avoid
Confusing CTC with "last drawn salary" is the most common error. The gratuity formula uses basic plus DA only, which in most private-sector pay structures is 35-50% of CTC. A ₹20 lakh CTC with 40% basic + DA gives a last drawn salary of ₹8 lakh annually, or roughly ₹66,666 monthly for the formula. Plugging the full ₹1.67 lakh monthly CTC overstates gratuity by 150% and leads to incorrect expectations at exit.
Counting service incorrectly is the second-most-common slip. The Act requires continuous service, which is more permissive than it sounds; authorised leave, layoff and absence due to accident or disease all count. But probation under a separate contract that converted to permanent later may or may not count, depending on how the company drafted the offer letter. If you joined as a contractor and converted to FTE, only the FTE period typically counts unless the company has an explicit policy otherwise. Confirm with HR before assuming.
The 5-year eligibility rule is strict, so anyone close to the line should plan the exit date carefully. The EMI calculator and the SIP calculator are useful for deciding what to do with the lump sum once it lands. Leaving at 4 years 11 months instead of 5 years 0 days can cost a mid-career employee ₹3-5 lakh on a typical salary.
Forgetting the lifetime ceiling is the last trap. The ₹20 lakh tax-exempt limit is aggregate across all employers in your career. If you received ₹15 lakh tax-free gratuity from a previous job, only the remaining ₹5 lakh from the next job will be exempt. This catches senior employees moving between companies in the same industry late in their careers.
Glossary +
- Gratuity
- A lump sum amount paid by the employer to an employee for long service, on separation, retirement, death or disablement. Governed in India by the Payment of Gratuity Act, 1972.
- Continuous service
- Uninterrupted service with the same employer including leave, layoff, strike that is not the employee's fault, and absence due to disablement caused by accident or disease.
- Last drawn salary
- Basic salary plus dearness allowance (DA) at the time of separation. Excludes HRA, bonus, allowances and CTC components beyond basic and DA.
- Covered establishment
- Any factory, mine, oilfield, plantation, port, railway company, shop or other establishment with 10 or more employees in any of the preceding 12 months.
- Form I
- The application form an employee or legal heir submits to the employer to claim gratuity payment within 30 days of becoming due.
- Controlling Authority
- The officer appointed under the Act in each state to adjudicate gratuity disputes between employer and employee. First level of escalation if the employer refuses or underpays.
- Section 10(10)
- The Income Tax Act clause that exempts gratuity from tax. Sub-clauses (i), (ii) and (iii) cover government, covered private and non-covered private employees respectively.
- ₹20 lakh ceiling
- The statutory cap on gratuity payment for employees covered by the Act, raised from ₹10 lakh in March 2018 via a CBDT notification. Also the tax-exemption ceiling.
- Forfeiture
- Employer's right under Section 4(6) to withhold gratuity, partly or wholly, only when termination is due to riotous conduct, moral turpitude or wilful damage to property.
- Code on Social Security, 2020
- The new consolidated labour code that subsumes the Payment of Gratuity Act once notified. Maintains the same formula and ₹20 lakh ceiling.
Frequently Asked Questions
What is gratuity? +
Gratuity is a lump sum amount your employer pays you for long service when you leave the company, retire or in case of death or disablement. It's governed by the Payment of Gratuity Act, 1972 for most private sector establishments with 10 or more employees. The employer funds it, so you don't pay anything into it during your working years.
Who is eligible for gratuity? +
You need at least 5 years of continuous service with the same employer. The 5-year rule is waived in case of death or disablement, where gratuity is paid regardless of tenure. Establishments covered by the Act include factories, mines, oilfields, plantations, ports, railways, shops and most companies with 10+ employees in any of the preceding 12 months.
How is gratuity calculated? +
For employees covered by the Payment of Gratuity Act, the formula is (15 × last drawn monthly salary × years of service) / 26. The 26 represents working days in a month, excluding Sundays. For employees in non-covered establishments, the formula uses 30 instead of 26 in the denominator. Last drawn salary means basic plus dearness allowance (DA), not the full CTC.
What's the difference between covered and non-covered employers? +
Covered means your employer falls under the Payment of Gratuity Act (10+ employees, registered factory, etc). Non-covered means smaller establishments not under the Act. Both pay gratuity but the formula and tax exemption differ. Covered employees get the more generous (15/26) formula and a ₹20 lakh tax-exemption ceiling. Non-covered employees get (15/30) and a ₹10 lakh exemption.
Is gratuity taxable? +
Government employees: fully tax-free under Section 10(10)(i). Private-sector employees covered by the Gratuity Act: exempt up to ₹20 lakh under Section 10(10)(ii), with anything above taxed at slab rate. Private-sector employees not covered by the Act: exempt up to ₹10 lakh under Section 10(10)(iii). The ₹20 lakh ceiling was raised from ₹10 lakh in 2018 via a CBDT notification.
What's the maximum gratuity an employer must pay? +
₹20 lakh under the Payment of Gratuity Act, raised from ₹10 lakh in March 2018. The employer is not obligated to pay more even if the formula gives a higher number. Many large companies do pay more voluntarily, especially in IT and BFSI, but anything above the ceiling becomes taxable. The ₹20 lakh ceiling is a lifetime limit across all employers, not per-employer.
What if I leave before completing 5 years? +
No gratuity. The 5-year rule under Section 4 is strict. Some courts have read this as 4 years 240 days (Madras HC, 1998) where continuous service is interpreted generously, but the standard interpretation followed by most companies and the Controlling Authority is 5 full years. Plan resignations around your gratuity date if you're close, the difference can be ₹3-5 lakh on a mid-career salary.
How is partial year of service treated? +
Six months and above counts as a full year, less than six months is dropped. So 7 years 6 months becomes 8 years, but 7 years 5 months stays at 7 years. The cutoff applies to the final year only; for years 1 to 6 you need to have completed each year cleanly to count it.
When and how is gratuity paid out? +
Within 30 days of becoming payable, under Section 7(3) of the Act. You submit Form I to the employer (Form J for legal heir, Form K for nominee in death cases). If the employer delays beyond 30 days, simple interest is payable until the date of actual payment. Disputes go to the Controlling Authority appointed under the Act for your state.
Can gratuity be forfeited? +
Yes, in specific cases under Section 4(6). Wholly or partly, if termination is due to riotous or disorderly conduct, an act involving moral turpitude during employment, or wilful damage to employer property. The forfeiture is limited to the loss caused; the employer cannot deny gratuity entirely just because of misconduct unless the misconduct caused proportionate financial damage. Resignation, even acrimonious, does not trigger forfeiture.
References & sources
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