Gratuity is mandatory for employees who have completed 5+ years of continuous service. The formula differs for covered vs non-covered employees.
Gratuity — Everything You Need to Know
What is gratuity and who is eligible?+
Gratuity is a lump sum payment made by an employer to an employee as a token of gratitude for services rendered. Under the Payment of Gratuity Act 1972, it is mandatory for establishments with 10 or more employees. Eligibility: employee must have completed minimum 5 years of continuous service (except in case of death or disablement). It applies to all employees — permanent, contract, and daily-wage workers covered under the Act.
What is the gratuity calculation formula?+
For employees covered under the Payment of Gratuity Act: Gratuity = (Last Drawn Salary × 15 × Years of Service) / 26. Here, last drawn salary includes Basic + DA only (not HRA, bonus, commissions). 26 represents working days per month, and 15 represents 15 days pay per year of service. For employees NOT covered under the Act, the formula is: Gratuity = (Last Drawn Salary × 15 × Years of Service) / 30.
Is gratuity taxable in India?+
For government employees: Gratuity is fully tax-exempt. For private sector employees (covered under Gratuity Act): Tax exemption is the minimum of (a) Actual gratuity received, (b) ₹20 lakhs, (c) (Last drawn salary × 15 × Years of service) / 26. The exemption limit was raised to ₹20 lakhs. Gratuity beyond ₹20 lakhs is taxable as per your income tax slab.
What counts as salary for gratuity calculation?+
For gratuity calculation, "last drawn salary" means Basic Salary + Dearness Allowance (DA) only. HRA, bonus, commission, overtime, and other allowances are NOT included. This is why gratuity calculation uses Basic + DA — these are the two components defined in the Payment of Gratuity Act 1972.
What if I leave before 5 years?+
Normally, gratuity is not payable if service is less than 5 years. However, two exceptions: (1) If employee dies or is permanently disabled — gratuity is paid even before 5 years, calculated proportionally. (2) Some companies have their own more generous gratuity policies that may pay before 5 years as a goodwill gesture. Check your appointment letter or HR policy for your company's specific terms.
Does 4 years 8 months count as 5 years for gratuity?+
Yes. As per a Supreme Court ruling and the Payment of Gratuity Act, if an employee has completed 4 years and 240 days (approximately 4 years and 8 months), it is rounded up to 5 years for gratuity purposes. This makes them eligible for gratuity. Similarly, 10 years and 240+ days counts as 11 years.