Gratuity Calculation Guide: Formula, Rules & Tax Exemption
Complete guide to gratuity calculation, eligibility, and ₹20 lakh tax exemption
- Gratuity = (Basic + DA) x 15 x Years / 26 for covered employees
- Eligibility: Minimum 5 years of continuous service (4 years 240 days counts as 5 years)
- Maximum limit: Rs 20 lakh (fully exempt from tax for this amount)
- Payable within 30 days of separation; delay attracts 10% interest
What is Gratuity?
Gratuity is a lump sum payment made by employer to employee for services rendered. It's payable after completing 5 years of continuous service and serves as a retirement benefit or farewell gift.
Eligibility for Gratuity
Conditions under which an employee becomes eligible for gratuity payment
Minimum 5 Years Continuous Service
Must have completed 4 years 240 days (rounds to 5 years)
On Retirement, Resignation, or Termination
Payable when employment ends after 5 years
Death of Employee
Payable to legal heirs even if 5 years not completed
Disability Due to Accident/Disease
Payable even if service is less than 5 years
Gratuity Calculation Formulas
Different formulas apply based on whether employer is covered under Payment of Gratuity Act
Gratuity =
(Salary × 15 × Years) / 26
Where:
• Salary = Basic + DA
• 26 = Working days in a month
• Applies to establishments with 10+ employees
Gratuity =
(Salary × 15 × Years) / 30
Where:
• Salary = Basic + DA
• 30 = Calendar days in a month
• Applies to smaller establishments
Detailed Calculation Example
Step-by-step calculation for a covered employee
Last Drawn Basic Salary
₹50,000
Dearness Allowance (DA)
₹10,000
Total Last Drawn Salary
₹60,000
Years of Service
10 years
Calculation Steps:
Gratuity = (Salary × 15 × Years) / 26
Gratuity = (60,000 × 15 × 10) / 26
Gratuity = 90,00,000 / 26
Final Gratuity Amount
₹3,46,154
The 4 years 240 days rule: If you've worked for 4 years and 240 days (or 4 years and 190 days for miners), it's legally counted as 5 years of service, making you eligible for full gratuity. This is a common oversight that costs employees lakhs in benefits. Always negotiate your exit date to cross this threshold if you're close.
Maximum Gratuity Limit
Current Maximum: ₹20 Lakh
The maximum gratuity amount payable is capped at ₹20 lakh as per Payment of Gratuity (Amendment) Act, 2018.
Even if your calculated gratuity exceeds ₹20 lakh, you can only receive up to this limit.
Tax on Gratuity
Tax exemption rules vary based on employment type
Fully exempt from tax with no upper limit for central/state government employees
Exempt up to ₹20 lakh or actual amount received, whichever is lower
Exempt up to ₹20 lakh based on specific formula calculation
When is Gratuity Paid?
Timeline and important rules for gratuity payment
Payment Deadline: 30 Days
No TDS on Gratuity
If within exempt limit, no tax deduction at source required
Forfeiture Possible
Can be forfeited for misconduct, violence, or termination for cause
Part of CTC But Separate
Can be shown in CTC but paid separately on separation
Calculate Your Gratuity
Use our free online calculator to estimate your exact gratuity amount
Planning for retirement? Also explore our Retirement Calculator and EPF Calculator to get a complete picture of your retirement corpus.
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