Gratuity Calculation: Rules, Eligibility & Formula 2025

What is Gratuity?

Gratuity is a retirement benefit paid by employers to employees who have completed at least 5 years of continuous service. It's a thank you payment for long service.

Eligibility Criteria

You are eligible for gratuity if:

Minimum 5 years of continuous service

Exception: Death/disability - no minimum years

Works for an organization covered under Gratuity Act

Organizations Covered:

Factories with 10+ employees

Establishments with 10+ employees

Mines, oilfields, plantations, railways

Gratuity Calculation Formula

For Organizations under Payment of Gratuity Act:

Gratuity = (Last Drawn Salary × 15/26) × Years of Service

Where:

Last Drawn Salary = Basic + DA

15/26 = 15 days wages for each year

Years of Service = Round down to nearest year

For Other Organizations:

Gratuity = (Last Drawn Salary × 15/30) × Years of Service

Calculation Examples

Example 1: IT Company Employee

Basic Salary: ₹60,000/month

Years of Service: 7 years 8 months

Calculation:

Years considered: 8 (round up for >6 months)

Gratuity = (60,000 × 15/26) × 8

Gratuity = 34,615 × 8

Gratuity = ₹2,76,923

Example 2: Government Employee

Basic + DA: ₹80,000/month

Service: 15 years 4 months

Calculation:

Years considered: 15 (round down for <6 months)

Gratuity = (80,000 × 15/26) × 15

Gratuity = 46,154 × 15

Gratuity = ₹6,92,308

Maximum Gratuity Limit

Tax-exempt limit: ₹20,00,000

Any amount above ₹20 lakh is taxable as income

Limit was increased from ₹10 lakh in 2019

When is Gratuity Paid?

ScenarioGratuity Payable? Resignation after 5 yearsYes Resignation before 5 yearsNo Termination after 5 yearsYes Termination before 5 yearsNo RetirementYes Death (any duration)Yes Disability (any duration)Yes

Gratuity Tax Treatment

Fully Tax-Exempt (up to ₹20 lakh):

Government employees

Employees covered under Payment of Gratuity Act

Partially Taxable:

Non-government employees not covered under the Act

Exempt: Least of:

- Actual gratuity received - ₹20,00,000 - 15/30 × Salary × Years of service

Gratuity vs PF vs Severance

FeatureGratuityPFSeverance Eligibility5 yearsDay 1As per policy ContributionEmployer onlyBothEmployer TaxabilityExempt up to ₹20LExemptTaxable PortabilityNoYesNo

Key Points to Remember

Gratuity is employer-funded - No employee contribution

Part of CTC but paid only after 5 years

Cannot be forfeited for genuine service

Death/disability - Nominee receives full gratuity

Maximum limit - ₹20 lakh (tax-exempt)

Common Questions

Q: Is gratuity part of CTC? A: Yes, it's typically 4.81% of basic salary in CTC.

Q: What if I resign before 5 years? A: You don't get gratuity. The amount stays with employer.

Q: Is gratuity paid on last day? A: Employer must pay within 30 days of becoming due.

Calculate your gratuity with our Gratuity Calculator.