Gratuity Calculator

What is Gratuity?

Gratuity is a statutory benefit paid by employers to employees as a token of appreciation for their long-term service. It's governed by the Payment of Gratuity Act, 1972, which applies to organizations with 10 or more employees.

Real Example: Ramesh worked at TCS for 15 years and 7 months. His last drawn salary (Basic + DA) was ₹80,000. Since 7 months > 6, his service rounds to 16 years. His gratuity = (80,000 × 15 × 16) ÷ 26 = ₹7,38,462. This is fully tax-free as it's below the ₹20 Lakh limit.

Gratuity becomes payable when an employee:

• Resigns after completing 5 years of service
• Retires from service (superannuation)
• Dies or becomes disabled (5-year rule waived)
• Is terminated (unless for misconduct causing damage)

How is Gratuity Calculated?

There are two formulas depending on whether your organization is covered under the Payment of Gratuity Act:

For Employees Covered Under the Act

Most private sector employees in organizations with 10+ employees fall under this category.

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

• Last Drawn Salary: Basic Pay + Dearness Allowance (DA)
• 15: Number of days considered for each year of service
• 26: Working days in a month (excluding Sundays)
• Years of Service: Completed years (rounded up if >6 months)

For Employees NOT Covered Under the Act

Employees in organizations with fewer than 10 employees or specific exempted categories.

Gratuity = (Average Salary of Last 10 Months × ½ × Years of Service)

Here, the calculation uses half-month's salary for each year instead of 15/26 days.

Gratuity Calculation Examples

Maximum Gratuity Limit (2026)

The Payment of Gratuity Act sets a statutory cap of ₹20 Lakhs. This means:

• Even if the formula calculates more (like ₹34.6L in the last example), you're entitled to only ₹20 Lakhs under the Act
• Employers may voluntarily pay more, but the excess above ₹20L becomes taxable income
• Government employees have no such cap - they receive full calculated amount

Tax Exemption Rules on Gratuity

Gratuity enjoys significant tax benefits under Section 10(10) of the Income Tax Act:

Government Employees

Gratuity received by Central/State Government employees is 100% tax-free with no upper limit.

Private Sector Employees

The least of the following three is exempt from tax:

• Actual gratuity received
• ₹20 Lakhs (statutory limit)
• 15 days salary for each year of service (as per formula)

💡 Tax Tip: If you receive gratuity from multiple employers in the same financial year, the combined tax exemption cannot exceed ₹20 Lakhs. Plan your exit timing accordingly!

New Gratuity Rules Under Social Security Code 2020

The Social Security Code 2020, effective from November 2025, introduces key changes:

• Fixed-Term Employees: Now eligible for gratuity after just 1 year (previously 5 years)
• Wage Definition: Salary for gratuity must be minimum 50% of CTC
• Gig Workers: May be covered under certain conditions
• Payment Timeline: Must be paid within 30 days of resignation/retirement

When Can Gratuity Be Forfeited?

An employer can withhold gratuity only if the employee is terminated for:

• Riotous or disorderly conduct
• Any act of violence against employer or other employees
• Moral turpitude committed during employment
• Willful damage to employer's property

Simple resignation or performance-based termination does not forfeit gratuity rights.

Frequently Asked Questions (FAQs)