What is the gratuity formula in India?

For employees covered under the Payment of Gratuity Act 1972: Gratuity = (Last drawn Basic + DA) × 15 × Completed years of service ÷ 26. The '15' represents 15 days of wages per year; '26' is the number of working days in a month (excluding 4 Sundays). Service of more than 6 months in the last year is rounded up to a full year. Example: ₹60,000 basic+DA × 15 × 20 years ÷ 26 = ₹6,92,308.

What is the tax-free limit on gratuity in India 2026?

For private sector employees covered under the Payment of Gratuity Act, gratuity is tax-free up to ₹20 lakh under Section 10(10) of the Income Tax Act. This is a cumulative lifetime limit across all employers. Government employees enjoy full tax exemption with no cap (central government employees have a ₹25 lakh statutory cap, but the entire amount is tax-exempt). Any amount above ₹20L for private employees is added to income and taxed at slab.

Do I get gratuity if I resign before 5 years?

No — under the Payment of Gratuity Act, you must complete at least 5 years of continuous service to be eligible for gratuity on resignation or retirement. However, the 5-year rule is waived in case of death or permanent disability. Under the new Labour Code (effective November 2025), fixed-term contract employees are eligible for pro-rata gratuity after just 1 year of service — but this applies only to fixed-term employees, not permanent employees.

Is gratuity calculated on basic salary or CTC?

Gratuity is calculated only on Basic Salary + Dearness Allowance (DA). It excludes all other components — HRA, special allowance, LTA, bonus, incentives, commission, overtime, and any other allowances. Under the new Labour Code (2025), the basic wage must be at least 50% of total CTC, which effectively increases the gratuity base for many employees whose basic was artificially kept low.

Can my employer refuse to pay gratuity?

An employer can forfeit gratuity only in very specific circumstances: if the employee's services were terminated due to riotous or violent behaviour, or if the employee was convicted for an act constituting moral turpitude. In all other cases — resignation, retirement, retrenchment — gratuity is a statutory right and must be paid within 30 days. If delayed, the employer must pay interest. You can file a complaint with the Assistant Labour Commissioner if your employer delays or refuses.

What happens to gratuity if I die while in service?

In case of death, the 5-year service requirement is waived entirely. Gratuity is paid to the nominated family member (or legal heir if no nomination exists) based on the years of service completed. The amount is fully tax-free in the hands of the nominee. Always file a gratuity nomination form (Form F) with your employer and update it whenever your family situation changes.

Gratuity Rules India 2026 — Formula, ₹20L Tax-Free Limit, Eligibility & Calculation

What Is Gratuity — and Why It Matters at Retirement

Gratuity is a statutory lump-sum payment your employer makes when you retire, resign, or otherwise end employment after a minimum period of service. It is not part of your monthly salary — it is paid in one shot at the end of your tenure as a reward for long-term loyalty.

For many salaried professionals, gratuity is the third-largest component of their retirement package after EPF and NPS — and unlike most other retirement instruments, it is completely tax-free up to ₹20 lakh for private sector employees. For someone with 25–30 years of service, gratuity can be ₹10–20 lakh — a meaningful addition to the corpus that many people underestimate in their retirement planning.

Gratuity in India is governed by the Payment of Gratuity Act, 1972, which from November 2025 has been subsumed into the Code on Social Security, 2020 — bringing some important changes.

Who Is Eligible

You are eligible for gratuity if:

You work in an establishment with 10 or more employees (once the threshold is crossed, gratuity applies even if headcount later falls below 10)
You have completed at least 5 years of continuous service with the same employer
You leave due to retirement, resignation, superannuation, or retrenchment

The 5-year rule is waived in case of death or permanent disability due to accident or disease — gratuity is paid to the nominee or legal heir regardless of service length.

⚠️ New from November 2025 — Fixed-term employees: Under the Code on Social Security, fixed-term contract employees are now eligible for pro-rata gratuity after just 1 year of service. This is a significant change from the earlier 5-year rule. If you are on a fixed-term contract, you now have gratuity rights much earlier — ensure your employer knows and complies.

The Formula — How Gratuity Is Calculated

There are two formulas in India, depending on whether your employer is covered under the Payment of Gratuity Act:

Formula 1 — Covered under the Act (most salaried employees)

Gratuity = (Basic + DA) × 15 × Years ÷ 26

15 = days per year · 26 = working days per month (excludes 4 Sundays)

Formula 2 — Not covered under the Act (less than 10 employees)

Gratuity = (Basic + DA) × 15 × Years ÷ 30

30 = calendar days per month · gives a slightly lower amount than Formula 1

📌 The rounding rule: Service beyond 6 months in the last year counts as a full year. So 18 years 7 months = 19 years for gratuity. 18 years 4 months = 18 years. This rounding can mean ₹20,000–₹50,000 difference — worth knowing when you plan your retirement date.

Real Examples — Four Salary Levels

Example 1 — Priya, 5 years, ₹30,000 basic+DA
Gratuity = ₹30,000 × 15 × 5 ÷ 26 = ₹86,538 — fully tax-free

Example 2 — Rahul, 15 years, ₹60,000 basic+DA
Gratuity = ₹60,000 × 15 × 15 ÷ 26 = ₹5,19,231 — fully tax-free

Example 3 — Suresh, 25 years, ₹80,000 basic+DA
Gratuity = ₹80,000 × 15 × 25 ÷ 26 = ₹11,53,846 — fully tax-free

Example 4 — Kavita, 30 years, ₹1,20,000 basic+DA
Gratuity = ₹1,20,000 × 15 × 30 ÷ 26 = ₹20,76,923
Tax-free: ₹20,00,000. Taxable at slab: ₹76,923

Gratuity by Salary and Years — Quick Reference

Basic+DA / Month	10 Years	15 Years	20 Years	25 Years	30 Years
₹25,000	₹1.44L	₹2.16L	₹2.88L	₹3.61L	₹4.33L
₹40,000	₹2.31L	₹3.46L	₹4.62L	₹5.77L	₹6.92L
₹60,000	₹3.46L	₹5.19L	₹6.92L	₹8.65L	₹10.38L
₹80,000	₹4.62L	₹6.92L	₹9.23L	₹11.54L	₹13.85L
₹1,00,000	₹5.77L	₹8.65L	₹11.54L	₹14.42L	₹17.31L
₹1,20,000	₹6.92L	₹10.38L	₹13.85L	₹17.31L	₹20.77L*
₹1,50,000	₹8.65L	₹12.98L	₹17.31L	₹21.63L*	₹25.96L*

* Amounts marked exceed ₹20L — the excess above ₹20L is taxable at your slab rate. All others are fully tax-free.

Tax Rules — Section 10(10)

Gratuity tax treatment under Section 10(10) of the Income Tax Act depends on your employment type:

Employee Type	Tax Treatment	Cap
Central / State Govt employee	Fully tax-exempt — no limit	No cap (₹25L statutory ceiling)
Private sector — covered under Act	Tax-free up to ₹20L (Sec 10(10)(ii))	₹20L lifetime limit
Private sector — not covered under Act	Tax-free up to ₹20L (Sec 10(10)(iii))	₹20L lifetime limit

The ₹20L Limit Is Cumulative — Not Per Employer

This is the most commonly misunderstood aspect. The ₹20 lakh tax exemption is a lifetime limit across all employers combined, not a per-employer limit. If you received ₹12 lakh tax-free gratuity from your first employer, only ₹8 lakh of gratuity from subsequent employers qualifies for exemption. Track your cumulative exempt gratuity received across your career.

Multi-employer example:

Company A (15 years): Gratuity received ₹8L — fully tax-free (₹8L used of ₹20L lifetime limit)
Company B (12 years): Gratuity received ₹9L — ₹8L remaining limit means ₹8L tax-free, ₹1L taxable
Company C (8 years): Gratuity received ₹5L — lifetime limit fully used; entire ₹5L is taxable

Total gratuity across career: ₹22L. Tax-free: ₹20L. Taxable: ₹2L.

How Gratuity Appears in Your Tax Filing

Gratuity exempt under Sec 10(10) appears in Form 16 as exempt income — it reduces your taxable salary but must still be declared in your ITR under "Exempt income not to be included in total income." There is no TDS on gratuity below ₹20L. Above ₹20L, the employer deducts TDS on the taxable portion.

What Changed Under the New Labour Code (November 2025)

The Code on Social Security, 2020 became fully effective from November 21, 2025. Three changes directly affect gratuity:

Fixed-term employees now eligible after 1 year: Previously only permanent employees (5+ years) were eligible. Fixed-term contract workers now get pro-rata gratuity after 1 year — calculated the same way but for actual years worked.
Wage definition broadened: Under the new code, basic wages must be at least 50% of total CTC. Companies that had artificially suppressed the basic salary to reduce gratuity liability must now restructure. This effectively increases the gratuity base (and therefore the gratuity amount) for many employees.
Payment timeline tightened: Employers must pay gratuity within 30 days of it becoming due. Delays attract simple interest from the due date. This is enforceable.

💡 The wage restructuring impact: If your current basic is 30% of CTC (common in many IT companies), the new minimum 50% basic rule will increase your gratuity calculation base significantly. For example, if CTC is ₹15L and basic was ₹4.5L/year (30%), it must now be at least ₹7.5L/year — nearly doubling the gratuity base. This affects anyone still employed and hasn't yet retired.

Gratuity as Part of Your Retirement Corpus

Gratuity is a one-time lump sum at retirement — treat it as a bonus addition to your corpus. Our calculator has a dedicated gratuity field that correctly applies the ₹20L tax-free treatment and adds the net amount to your retirement corpus before running projections.

How gratuity changes your monthly retirement income:

Scenario: Retiring at 60 with ₹1 crore EPF+NPS+MF corpus.
Gratuity: ₹15L (fully tax-free, private sector, under ₹20L limit).

Without gratuity: ₹1 crore corpus → 4% withdrawal → ₹33,333/month
With gratuity: ₹1.15 crore corpus → 4% withdrawal → ₹38,333/month

That ₹15L gratuity adds ₹5,000/month to your retirement income — permanently, for 25+ years.

How to Invest Your Gratuity

Gratuity arrives as a lump sum at the start of your retirement. The decision of where to put it determines how it compounds over the next 20–25 years. Here is a practical framework:

First ₹30L: SCSS (if you are 60+) — 8.2% government-guaranteed, quarterly payouts, tax-free principal at maturity. If both you and spouse have gratuity, each can open a separate SCSS account (₹30L each = ₹60L total).
Above ₹30L: Balanced advantage fund or equity savings fund via SWP — more flexible, tax-efficient (LTCG), and keeps the money growing with the corpus.
Avoid parking it in a savings account — even for a month. At 7% SCSS vs 3.5% savings account on ₹15L, the difference is ₹52,500 in the first year alone.
Do not rush into an annuity with gratuity — annuity income is fully taxable and irrevocable. SCSS gives similar safety with better flexibility and tax treatment at maturity.

Add your gratuity to your retirement plan

Our calculator has a dedicated gratuity field with correct ₹20L tax-free treatment. See how it boosts your monthly income after all taxes. Free, no login.

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Frequently Asked Questions

I worked 4 years 8 months. Do I get gratuity? ▼

No — for permanent employees resigning or retiring, you need a minimum of 5 completed years of continuous service. 4 years 8 months rounds down to 4 years — you are not eligible. The rounding-up rule (6+ months counts as a full year) only applies to the final partial year once you have already crossed 5 full years. For example, 5 years 7 months = 6 years for gratuity calculation. But 4 years 11 months is still short of the 5-year threshold — no gratuity.

Does gratuity count toward my retirement corpus in tax calculations? ▼

Yes — gratuity net of tax is additional corpus available at retirement. It is separate from EPF (taxed under Sec 10(12)) and NPS (taxed under Sec 10(12A)). Each has its own exemption. So a person can receive: EPF fully tax-free + NPS 80% lump sum tax-free + gratuity up to ₹20L tax-free — three separate exemptions operating independently. This is why maximising all three simultaneously is so powerful from a tax perspective.

Can I take gratuity if I switch jobs? ▼

Yes — when you leave an employer after 5+ years, you receive gratuity at that point. It is paid directly to you; unlike EPF, there is no transfer option. The amount counts toward your ₹20L lifetime exemption. If you switch jobs multiple times during your career, you can receive gratuity at each employer change (subject to 5 years each time), but the total lifetime tax-free limit remains ₹20L cumulative. Track how much you have used.

My company is not covered under the Gratuity Act. Am I still eligible? ▼

Companies with fewer than 10 employees are not covered under the Act. However, employers can voluntarily pay gratuity. If paid voluntarily, the calculation uses Formula 2 (÷30 instead of ÷26), and the tax exemption still applies under Sec 10(10)(iii) — up to ₹20L. Many companies with fewer than 10 employees do pay gratuity voluntarily as good employment practice. Check your appointment letter or company policy.

What is a gratuity nomination and why is it important? ▼

A gratuity nomination (Form F under the Gratuity Act) designates who receives your gratuity if you die while in service. Without a valid nomination, the gratuity goes through the legal heirship process — which can take months or years and creates significant hardship for your family. File Form F with your HR department immediately if you haven't. Update it whenever your family situation changes — marriage, children, or death of a previously nominated person.

Gratuity Rules India 2026 — Formula, ₹20 Lakh Tax-Free Limit, Eligibility & What Changed