Gratuity is a lump sum your employer pays when you leave after at least five years of continuous service, as a thank-you for long service. It's based on your last basic pay and how many years you worked, and up to ₹20 lakh of it is tax-free for private-sector employees.
The gratuity formula
Covered by the Gratuity Act: gratuity = 15 × last monthly (basic + DA) × years of service ÷ 26Not covered: gratuity = 15 × last monthly (basic + DA) × completed years ÷ 30How years are counted
If your employer is covered by the law (10 or more employees), a part year of more than six months counts as a full year. So 6 years and 8 months counts as 7 years, but 6 years and 5 months counts as 6. If not covered, only completed years count.
The 26 in the formula stands for working days in a month, and 15 for half a month's pay for each year of service.
Worked example
Example: Last basic ₹50,000 a month, 6 years 8 months of service
Covered employer: 15 × ₹50,000 × 7 ÷ 26 = ₹2,01,923.
Not covered: 15 × ₹50,000 × 6 ÷ 30 = ₹1,50,000.
Both are well under the ₹20 lakh limit, so the whole amount is tax-free.
Eligibility and tax
- You normally need 5 years of continuous service. The rule doesn't apply on death or disability.
- Under the Code on Social Security, fixed-term employees can qualify after one year. Ask HR how your contract is treated.
- For private-sector employees, gratuity up to ₹20 lakh in a lifetime is tax-free; anything above is taxed as salary. Government employees' gratuity is fully exempt.
- Employers must pay within 30 days of it becoming due, or pay interest.
Many CTCs include gratuity at about 4.81% of basic (15 ÷ 26 ÷ 12). That's money you only receive if you stay five years, so leave it out when you work out monthly pay with the CTC to in-hand calculator.
How to use this calculator
- Enter your last monthly basic pay and DA.
- Enter your years and months of service.
- Choose whether your employer is covered by the gratuity law.
FAQs
Do I get gratuity before 5 years?
Usually not for permanent employees. Fixed-term employees may qualify after one year under the new labour codes.
Is gratuity part of CTC?
Many employers include it, at about 4.81% of basic. You only receive it if you meet the service rules.
Results are estimates for resident individuals under 60 and aren't tax, legal or financial advice. For your own return, check with a chartered accountant. Spotted a mistake? Tell us.