While the law mentions “5 years of continuous service”, in real life, gratuity eligibility depends on how your service period is calculated. Many employees qualify even if they have not completed a full 5 calendar years.
| Scenario | Eligible? | Explanation |
|---|---|---|
| 4 years 240 days (5-day work week) | ✅ Yes | Considered 5 years under court rulings |
| 4 years 6 months | ❌ No | Does not meet continuous service rule |
| Termination after 5 years | ✅ Yes | Gratuity payable unless dismissed for misconduct |
| Death or disability | ✅ Yes | 5-year rule does not apply |
Courts in India have consistently ruled in favour of employees when eligibility conditions are reasonably met.
Gratuity = (Last drawn salary × 15 × Years of service) ÷ 26
Gratuity is the amount your employer pays you when you leave after working for at least 5 years in the same organization. It's basically a thank-you payment for your service. The calculation is simple: 15 days salary for every year worked. But there's a cap - the maximum gratuity you can get is ₹20 lakh, even if your calculation shows more. This is governed by the Payment of Gratuity Act, 1972.
For FY 2025-26, gratuity calculation uses your last drawn salary which includes basic salary plus dearness allowance. The formula is: (Last salary × 15 days × years of service) ÷ 26. The 26 days here represent working days in a month. So if your last salary was ₹1 lakh and you worked for 10 years, gratuity = (1,00,000 × 15 × 10) ÷ 26 = ₹5.77 lakh, but capped at ₹20 lakh maximum. Gratuity up to ₹20 lakh is completely tax-free under Section 10(10) of the Income Tax Act.
The good news is gratuity is tax-free for most employees. If you've worked in a company covered under the Gratuity Act (usually companies with 10 or more employees), the tax-free limit is ₹20 lakh. Even if you get more than this, only the excess amount above ₹20 lakh is taxable as salary income. Many people combine gratuity with other retirement benefits and need to understand their complete tax position using our income tax calculator.
If you're planning your retirement or switching jobs, understanding gratuity helps you plan better financially. Combined with other benefits like EPF, pension, and leave encashment, gratuity can form a significant part of your retirement corpus. After receiving gratuity, if you want to see how much tax was deducted and what your final take-home amount will be, our calculator helps verify all calculations.
To understand complete gratuity rules and eligibility, check the Chief Labour Commissioner's Payment of Gratuity Act, 1972 which explains eligibility, calculation methods, and payment timelines.
Let’s break down the gratuity formula into simple steps so you can clearly understand how your final amount is calculated.
Step 1: Take your last drawn Basic Salary + Dearness Allowance
Step 2: Multiply it by 15 (representing 15 days’ salary)
Step 3: Multiply by completed years of service
Step 4: Divide the total by 26 (average working days in a month)
Example:
Last drawn salary: ₹80,000
Years of service: 12
Gratuity = (80,000 × 15 × 12) ÷ 26 = ₹5,53,846
Gratuity enjoys generous tax benefits in India, but the exemption depends on whether your employer is covered under the Payment of Gratuity Act.
| Employee Type | Tax-Free Limit | Tax Treatment |
|---|---|---|
| Government Employee | No limit | Fully tax-free |
| Covered under Gratuity Act | ₹20 lakhs | Excess taxed as salary income |
| Not covered under Act | ₹20 lakhs | Least of 3 conditions applies |
Gratuity received on retirement, resignation, death, or disability enjoys the same tax exemption limits.
Select Employee Type
Choose whether you're a regular employee, government employee, or contract worker
Enter Salary Details
Input your monthly basic salary and dearness allowance (if applicable)
Enter Service Period
Specify your complete years and additional months of service
Calculate Gratuity
Click calculate to get your gratuity amount with tax implications
Gratuity is often misunderstood, leading to wrong expectations or missed claims. Avoid these common mistakes.
• Assuming gratuity is paid automatically
• Leaving just before completing eligibility period
• Not including DA in salary calculation
• Thinking resignation cancels gratuity
• Ignoring gratuity in retirement planning
• Not following up within 30 days of exit
A simple check using a gratuity calculator can prevent loss of lakhs of rupees.
Gratuity is a retirement benefit paid by employers to employees who have completed at least 5 years of continuous service. It's governed by the Payment of Gratuity Act, 1972 and applies to establishments with 10 or more employees.
Gratuity is calculated using the formula: (Last drawn salary × 15 × Years of service) ÷ 26. The last drawn salary includes basic salary and dearness allowance. The maximum gratuity limit is ₹20 lakhs.
Gratuity up to ₹20 lakhs is completely tax-free. Any amount exceeding this limit is taxable as per your income tax slab. No TDS is deducted if the gratuity amount is less than ₹20 lakhs.
If you leave before completing 5 years of service, you are not eligible for gratuity under the Payment of Gratuity Act. However, some employers may have their own gratuity policies that are more generous.
No, gratuity must be paid as a lump sum amount within 30 days of the employee's resignation or retirement. Delayed payment may attract interest at the rate of 10% per annum.
Gratuity is a retirement benefit paid entirely by the employer, while provident fund is a contribution-based scheme where both employer and employee contribute. Gratuity is calculated based on years of service and last drawn salary, while PF is based on contributions made.
Yes, contract workers are also eligible for gratuity if they have completed 5 years of continuous service with the same employer, even if they were employed through a contractor.
If your employer refuses to pay gratuity, you can file a complaint with the Labor Commissioner or approach the appropriate authority under the Payment of Gratuity Act. The employer may face penalties for non-compliance.
Yes, you are eligible for gratuity even if you are terminated, as long as you have completed 5 years of service. However, if termination is due to misconduct, the employer may forfeit the gratuity amount.
The gratuity limit is revised periodically by the government. The current limit of ₹20 lakhs was increased from ₹10 lakhs in 2017. Any future revisions will be announced by the government and will apply to new gratuity calculations.