Gratuity Calculator

What Is Gratuity in India?

Gratuity is a lump sum payment an employer gives to an employee as a reward for long service. Under the Payment of Gratuity Act, 1972, it's mandatory for organizations with 10 or more employees. The employee must complete at least 5 continuous years of service to be eligible (courts have held that 4 years and 240 days counts as 5 years). Gratuity is calculated at 15 days of last drawn salary for every completed year of service. The current maximum gratuity payable under the Act is Rs 20 lakh, though employers can pay more voluntarily. Over 80% of organized sector employees in India are covered under the Act (Ministry of Labour, 2023).

How Is Gratuity Calculated? Formula with Example

The gratuity formula under the Payment of Gratuity Act is: Gratuity = (Last Drawn Salary x 15 x Years of Service) / 26. Here, last drawn salary means basic salary + dearness allowance. The divisor is 26 because it represents 26 working days in a month (excluding 4 Sundays).

Who Is Eligible for Gratuity?

Eligibility depends on the type of organization and the circumstances of separation.

• 5 years of continuous service: The standard requirement under the Payment of Gratuity Act. Applies to resignation, retirement, and termination.
• Less than 5 years (death or disability): If an employee dies or becomes permanently disabled, gratuity is payable regardless of how long they've worked. Even 1 day of service qualifies.
• Fixed-term contract employees: The 2018 amendment made fixed-term employees eligible for gratuity on a pro-rata basis even without completing 5 years, if their contract ends.
• Part-time employees: Not explicitly covered under the Act, but some High Court rulings have extended gratuity rights to part-time workers in specific cases.
• The 4 years 240 days rule: Multiple court judgments (including the Supreme Court) have held that an employee who has completed 4 years and 240 days is deemed to have completed 5 years for gratuity purposes.

Gratuity Tax Rules: How Much Is Tax-Free?

Gratuity taxation depends on whether you're a government employee, private sector employee covered under the Act, or not covered.

Recent Changes to Gratuity Rules (2024-2025)

The Code on Social Security, 2020 proposes several changes to gratuity that are pending implementation. Once notified, it will reduce the eligibility period from 5 years to 1 year for fixed-term contract workers. The draft rules also propose allowing gratuity for gig and platform workers. The maximum gratuity limit of Rs 20 lakh hasn't been revised since 2018, and industry bodies like CII and FICCI have been advocating an increase to Rs 30 lakh. For now, the Payment of Gratuity Act, 1972 with its 2018 amendments remains the governing law.