What is the formula for calculating gratuity in India?

Under the Payment of Gratuity Act 1972, gratuity is calculated as: Gratuity = (Last drawn basic salary + DA) x 15/26 x Number of completed years of service. The factor 15/26 represents 15 days of wages out of 26 working days in a month. For employees not covered under the Act, gratuity is calculated as: Last drawn salary x 15/30 x Years of service, where 30 represents 30 calendar days per month.

Am I eligible for gratuity after 5 years of service?

Yes, gratuity eligibility requires a minimum of 5 continuous years of service with the same employer under the Payment of Gratuity Act. However, if an employee dies or becomes disabled due to accident or disease, gratuity is payable irrespective of the service period. Courts have also held that service of 4 years and 240 days (in the fifth year) qualifies as 5 completed years for gratuity purposes.

What is the maximum gratuity amount payable under the Payment of Gratuity Act?

The maximum gratuity payable under the Payment of Gratuity Act 1972 is Rs 20 lakh (Rs 2 million). This ceiling was last revised in March 2018 from the earlier limit of Rs 10 lakh. Employers can voluntarily pay gratuity exceeding Rs 20 lakh as a goodwill gesture, but the tax-exempt limit under Section 10(10) of the Income Tax Act also follows this ceiling of Rs 20 lakh for government employees and Rs 20 lakh for private sector employees.

Is gratuity taxable in India?

Gratuity received by government employees is fully exempt from income tax. For private sector employees covered under the Payment of Gratuity Act, the lower of actual gratuity received, the statutory formula amount (15/26 x last salary x years), or Rs 20 lakh is exempt from tax. Any amount exceeding the exempt limit is taxable as salary income. Gratuity paid on death or disability is fully tax-exempt regardless of the amount.

How many days of salary per year is gratuity based on?

Gratuity for employees covered under the Payment of Gratuity Act is calculated at 15 days of salary per completed year of service, using 26 as the denominator (26 working days in a month excluding Sundays). For employees not covered under the Act, many employers use 15/30 (half a month's salary per year). Some companies offer enhanced gratuity at 30 days per year as part of a superior benefits package.

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Gratuity Calculator

Basic Pay (per month)

₹

Dearness Allowance (per month)

₹

Years of Service5 yrs

Gratuity Amount

₹1,44,231

Monthly Salary (Basic + DA)₹50,000

Years of Service5 years

Frequently Asked Questions

What is gratuity and how is it calculated?

Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for long service. Under the Payment of Gratuity Act, 1972, it is calculated using the formula: (Basic Pay + Dearness Allowance) × 15 × Years of Service ÷ 26. The factor 15 represents 15 days' wages for each completed year of service, and 26 represents the number of working days in a month.

What is the minimum service period required to be eligible for gratuity?

An employee must have completed a minimum of 5 continuous years of service with the same employer to be eligible for gratuity under the Payment of Gratuity Act, 1972. However, in the case of death or disability of the employee, gratuity is payable even if the 5-year condition is not met.

What is the maximum gratuity amount allowed tax-free?

As of the latest amendment, the maximum gratuity amount exempt from income tax for private-sector employees is ₹20,00,000 (₹20 lakh). Any gratuity received above this limit is taxable. For government employees, the entire gratuity amount is tax-free, irrespective of the amount received.

Is the dearness allowance (DA) included in gratuity calculation?

Yes, dearness allowance (DA) is included in the gratuity calculation under the Payment of Gratuity Act. The formula uses (Basic Pay + DA) as the base salary. However, other allowances such as HRA, travel allowance, or special pay are not included in the gratuity calculation.

When must the employer pay gratuity?

The employer must pay gratuity within 30 days from the date it becomes payable. If gratuity is not paid within this period, the employer is liable to pay simple interest at the rate applicable from time to time. The employee or their nominee can apply for gratuity in Form I to the employer.