How Gratuity Is Calculated: Formula and Eligibility
Gratuity is a lump sum your employer pays when you leave after long service, as a thank-you for your work. Many people know it exists but not how the amount is worked out. This guide explains the formula step by step, and you can check your own number with the Gratuity Calculator.
Key takeaways
- Gratuity = last drawn monthly basic + DA × 15 × years of service ÷ 26.
- Permanent employees usually need five years of continuous service, with exceptions such as death or disability.
- For private-sector employees, gratuity is tax-free up to a lifetime limit of ₹20 lakh. For government employees it is fully tax-free.
The gratuity formula
For most employees, gratuity is 15 days' wages for every completed year of service, using a 26-day working month:
Gratuity = Last drawn salary × 15 × Years of service ÷ 26
"Last drawn salary" means your last monthly basic pay plus dearness allowance (DA). HRA, special allowance and bonus are not part of it. If you worked more than 6 months in your final year, it counts as a full year.
Worked example
Suppose your last basic plus DA is ₹50,000 a month.
- 12 years of service: 50,000 × 15 × 12 ÷ 26 = ₹3,46,154 (rounded).
- 7 years 8 months of service: more than 6 months in the last year, so it counts as 8 years. 50,000 × 15 × 8 ÷ 26 = ₹2,30,769 (rounded).
Notice that the second person gains because of the rounding rule, and that only basic plus DA is used, so a higher basic share of your pay gives a higher gratuity.
Who is eligible?
A permanent employee usually needs five years of continuous service. The five-year rule does not apply if the employment ends because of death or disability. Under the new Labour Codes, fixed-term employees qualify after one year of service, with gratuity worked out pro rata.
Is gratuity taxable?
For private-sector employees, gratuity is tax-free up to a lifetime limit of ₹20 lakh. Anything above that is added to your income and taxed at your slab rate. The limit is for your whole career, not per job: if you received tax-free gratuity from an earlier employer, that amount is reduced from the ₹20 lakh. For central and state government employees, gratuity is fully tax-free.
Taxable part in the example
Both amounts above are well under ₹20 lakh, so the whole amount would be tax-free for a private-sector employee who has not used the limit earlier.
What the new Labour Codes changed
- Fixed-term employees qualify after one year of service, worked out pro rata.
- Wages must be at least half your pay. From 21 November 2025, basic pay plus DA must make up at least 50% of your total salary. If allowances are higher than that, the extra is added back when working out gratuity, which can raise the amount.
Rules can be updated, so check the latest rules and your employer's policy before relying on any figure.
When is it paid?
Gratuity must be paid within 30 days of becoming due. If your employer delays, they must pay simple interest on the amount. The formula is the minimum required by law; some employers pay more under their own policy, but the tax-free limit stays at ₹20 lakh.
To see how gratuity fits into your overall pay, read our guide on CTC vs in-hand salary.
Try the calculator
Gratuity CalculatorSalary In-Hand Calculator
Frequently asked questions
Do I get gratuity if I leave before 5 years?
Usually not, if you are a permanent employee. The 5-year rule does not apply if you leave because of death or disability. Fixed-term employees qualify after one year under the new Labour Codes.
Is the ₹20 lakh limit per job or for my whole career?
It is a lifetime limit for private-sector employees. If you received tax-free gratuity from an earlier employer, that amount is reduced from the ₹20 lakh limit.
Which salary is used for gratuity?
Your last drawn monthly basic pay plus dearness allowance. Other allowances are generally not included, subject to the 50% wage rule under the new Labour Codes.
Can my employer pay more than the formula?
Yes. The formula is the minimum required by law. Some employers pay more under their own policy, but the tax-free limit stays at ₹20 lakh.