How it works
If your employer is covered by the Payment of Gratuity Act (generally an establishment with 10 or more employees), gratuity is 15 days of salary for every year of service. A month is taken as 26 working days, so 15 days of pay is salary × 15 ÷ 26.
Years are counted in full years. If the part-year is six months or more, it is rounded up to the next year. 7 years and 7 months counts as 8 years, while 7 years and 3 months counts as 7.
If your employer is not covered by the Act, the usual method divides by 30 instead of 26, and only completed years count. Many private employers pay the covered amount anyway, so check your policy.
“Salary” here means basic pay plus dearness allowance (DA), not your full CTC. Allowances such as HRA and bonuses are generally left out.
The formula
Covered: Gratuity = last drawn monthly salary × 15 ÷ 26 × years of service
Not covered: Gratuity = last drawn monthly salary × 15 ÷ 30 × completed years of service. The amount is capped at ₹20 lakh under the Act.
A worked example
A last drawn salary (basic + DA) of ₹50,000 and 10 years and 7 months of service. The covered formula counts 11 years: 50,000 × 15 ÷ 26 × 11 = ₹3,17,308.
Frequently asked questions
How many years of service do I need?
The usual rule is five years of continuous service, with exceptions such as death or disability. The new labour codes also provide for gratuity after one year for fixed-term employees. Rules like this have been changing, so confirm with your employer or HR which applies to you.
Is gratuity taxable?
Government employees receive it tax free. For private employees, the tax-free amount is the lowest of the gratuity received, the formula amount and the legal limit. Anything above that is added to your income. Check the current limit before you rely on it.
What counts as the “last drawn salary”?
Basic pay plus dearness allowance, taken from your last month of service. If your employer’s payslip splits basic and DA, add them together.
My company pays more than this. Is that allowed?
Yes. The Act sets a minimum. Your employer can pay more, and the extra may be taxed differently.