Gratuity calculation in India: formula, eligibility, the 5-year rule, and what you will actually receive
Gratuity = (basic salary × 15 × years of service) ÷ 26. At ₹50,000 basic after 10 years that is ₹2.88 lakh. This guide shows the exact formula, how the 5-year rule is counted (and why 4 years 8 months often qualifies), what counts as basic salary, and four worked examples.
All figures and facts in this article are sourced directly from primary government and regulatory publications — including the Reserve Bank of India, SEBI, EPFO, the Income Tax Department, PFRDA, and IRDAI — and verified before publication. No claim is published from a single source without corroboration.
For informational purposes only. Gratuity rules are governed by the Payment of Gratuity Act, 1972 — verify current rules at labour.gov.in. Consult a labour law practitioner or CA for advice specific to your situation.
Gratuity is a lump-sum payment from your employer when you leave after completing a minimum period of service. It is not a bonus or gift — it is a statutory right for eligible employees, calculated using a fixed formula under the Payment of Gratuity Act, 1972.
Most salaried employees know gratuity exists but not how it is calculated. This guide shows the exact formula, who qualifies, what counts as "5 years," and what your gratuity would be at your current salary.
Who is covered by the Payment of Gratuity Act
The Act applies to:
- Every factory, mine, oilfield, plantation, port, and railway company
- Every shop or establishment with 10 or more employees on any day in the preceding 12 months
Once an establishment crosses the 10-employee threshold, the Act continues to apply even if the headcount later drops below 10.
Most private-sector companies, IT firms, and service businesses with 10 or more employees are covered. If your employer has fewer than 10 employees, gratuity may be paid voluntarily but is not legally mandated under this Act.
Source: Payment of Gratuity Act, 1972, India Code
The gratuity formula
```
Gratuity = (Last drawn basic salary + DA) × 15 × Years of service
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26
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Where:
- Last drawn basic salary + DA = your basic salary plus Dearness Allowance in your final month of employment (not gross salary, not CTC)
- 15 = days of salary per year of service
- 26 = number of working days assumed in a month
- Years of service = completed years (see rounding rules below)
The formula gives you 15 days of basic salary for every completed year of service.
How years of service are counted: the rounding rule
- Less than 6 months in the final year: rounded down. Example: 7 years 4 months = 7 years.
- 6 months or more in the final year: rounded up. Example: 7 years 7 months = 8 years.
The 4 years 8 months question: A very common question is whether 4 years and 8 months qualifies as 5 years (the minimum for gratuity). The answer:
- For employees working 6 days a week: 240 days in a year counts as a full year. 4 years 240 days = 5 years for gratuity purposes.
- For employees working 5 days a week: 190 days in a year counts as a full year (per a Supreme Court ruling).
In most corporate environments (5-day week), 4 years 8 months (approximately 4 years 190+ working days) is treated as completing 5 years and qualifies for gratuity. This is why "4 years 8 months" has become the practical threshold for most IT and services employees.
Always verify this with your HR — interpretation can vary by employer, and some require the full 5 calendar years.
Worked examples at four salary levels
Example 1: Ananya, basic salary ₹30,000/month, 7 years of service
Gratuity = (₹30,000 × 15 × 7) / 26 = ₹31,500 / 26 × 7 = ₹1,21,154
Example 2: Rahul, basic salary ₹50,000/month, 10 years of service
Gratuity = (₹50,000 × 15 × 10) / 26 = ₹2,88,462
Example 3: Priya, basic salary ₹80,000/month, 15 years of service
Gratuity = (₹80,000 × 15 × 15) / 26 = ₹6,92,308
Example 4: Vikram, basic salary ₹1,20,000/month, 20 years of service
Gratuity = (₹1,20,000 × 15 × 20) / 26 = ₹13,84,615
All figures use the standard Act formula. Actual gratuity depends on your final month's basic salary at exit.
What counts as basic salary for the gratuity formula
The formula uses basic salary plus Dearness Allowance (DA). It does not include:
- HRA
- Special allowance
- Transport allowance
- Performance bonus or variable pay
- Any other allowances
This is why a low basic salary (as discussed in Zero to One Chapter 1) significantly reduces your gratuity. An employee with ₹1,20,000 CTC but only ₹36,000 basic (30% of CTC) receives far less gratuity than one with ₹60,000 basic (50% of CTC) at the same CTC.
| CTC (monthly) | Basic (30%) | Basic (50%) | Gratuity difference after 10 years |
| ₹1,00,000 | ₹30,000 | ₹50,000 | ₹2,88,462 − ₹1,73,077 = ₹1,15,385 less |
Is there a maximum gratuity amount?
There is no statutory cap on the gratuity amount that can be paid. However, tax exemption is limited — gratuity received above ₹20 lakh is taxable as salary income. (This is a tax limit, not a payment limit. An employer can pay more than ₹20 lakh in gratuity — the excess is just taxable.)
For most salaried employees in the private sector, the gratuity receivable after 10–15 years rarely exceeds ₹20 lakh given the basic salary constraints and the 15/26 formula, so the tax exemption covers the full amount in most cases.
Tax on gratuity is covered separately in the companion article: [How is gratuity taxed — the ₹20 lakh exemption limit](/tax/how-gratuity-is-taxed-20-lakh-exemption-tds).
When is gratuity paid
Gratuity is payable on:
- Retirement (at superannuation age)
- Resignation after completing 5 years of continuous service
- Death or disablement due to accident or disease (the 5-year minimum is waived — gratuity is payable regardless of service period, paid to the nominee)
- Termination (retrenchment, closure of business)
The employer must pay gratuity within 30 days of the date it becomes payable. If payment is delayed beyond 30 days, the employer owes simple interest at the prescribed rate on the outstanding amount.
◇ Quick check: calculate your own gratuity
Take your current monthly basic salary (from your payslip — the "Basic" line, not gross).
Your estimated gratuity (if you leave today):
Monthly basic × 15 × completed years of service ÷ 26
If you have, say, ₹45,000 basic and 6 years of service:
₹45,000 × 15 × 6 ÷ 26 = ₹1,55,769
Keep in mind: this figure uses your current basic. At exit, it will use your final month's basic, which may be higher.
⚠ Common mistake: Calculating gratuity on gross salary or CTC instead of basic. The formula specifically uses basic + DA. Applying it to gross can overstate the figure by 2–3× depending on your salary structure.
Bottom line
- Gratuity is calculated as: (basic + DA) × 15 × years of service ÷ 26
- Minimum eligibility: 5 continuous years of service (or 4 years + 190–240 working days in the final year, depending on your work week)
- Years of service are rounded: 6+ months in final year rounds up; less than 6 rounds down
- The formula uses basic salary only — not HRA, allowances, or variable pay
- Gratuity is payable within 30 days of exit; no upper limit on amount, but tax exemption is capped at ₹20 lakh
Frequently asked questions
Q: My company is not covered under the Payment of Gratuity Act (fewer than 10 employees). Am I entitled to gratuity?
A: Not under the Act. However, many smaller employers voluntarily pay gratuity as part of their employment terms. Check your employment contract or HR policy. If gratuity is mentioned in your offer letter or company policy, it is contractually enforceable even if the Act does not apply.
Q: I resigned after 4 years 10 months. My employer says I don't qualify. What can I do?
A: If your work week is 5 days, the Supreme Court's interpretation means 4 years + 190 working days qualifies as 5 years. File a claim with the Controlling Authority under the Payment of Gratuity Act (typically the Labour Commissioner in your state). The process involves filing Form I, after which the authority can direct the employer to pay.
Q: My employer went bankrupt. Can I still get my gratuity?
A: Gratuity is an unsecured creditor claim in insolvency proceedings. In practice, recovery can be difficult. Some states have gratuity insurance mandates which protect employees in such cases. This is a complex area — consult a labour lawyer if you are facing this situation.
Q: I worked at two different companies. Does service at both count toward the 5-year threshold?
A: No. The 5-year minimum is for continuous service with the same employer. Service periods across different employers do not combine. Each employment is evaluated independently.
Q: My company offers gratuity as part of my CTC. Does that mean it is already deducted from my salary?
A: Many employers include gratuity as a component in the CTC illustration (typically shown as 4.81% of basic — equivalent to 15/26 × 1/12). This is a cost-accounting entry, not an actual deduction. You do not receive less salary because of it; it represents what the employer expects to eventually pay you. The actual payment happens at exit after completing 5 years.
Sources: Payment of Gratuity Act, 1972, India Code · Gratuity rules, Ministry of Labour
Last verified: May 2026. Gratuity rules are governed by the Payment of Gratuity Act, 1972, as amended. Verify current rules at labour.gov.in.
Content on Ek Crore is for educational purposes only. Nothing here is financial advice. Always consult a SEBI-registered advisor, CA, or qualified professional before making investment or tax decisions.