Gratuity Calculation in India — Understanding the 15/26 Formula
Gratuity is a lump-sum benefit paid by an employer to an employee in recognition of their long service. In India, it is governed by the Payment of Gratuity Act, 1972, which applies to any organisation with 10 or more employees. The formula used to calculate gratuity is:
Gratuity = (15 × Last Drawn Basic + DA × Years of Service) ÷ 26
The 15 represents 15 days of wages for each year served. The 26 represents the number of working days in a month (a month has ~30 days minus 4 Sundays). This formula is mandated for employees covered under the Act. For employees not covered (organisations with fewer than 10 employees), the formula uses 30 working days instead of 26, resulting in a slightly lower payout.
Who Is Eligible for Gratuity?
Any employee — whether salaried or on wages — who has completed 5 or more years of continuous service with the same employer is eligible. There is one key rounding rule: if the number of months in the final incomplete year exceeds 6, it is rounded up to a full year. So 6 years and 7 months is treated as 7 years for gratuity calculation purposes, whereas 6 years and 4 months is treated as 6 years.
The 5-year minimum is waived in cases of death or permanent disability — in such cases, gratuity is payable regardless of how long the employee worked. See how your take-home salary is affected by gratuity deductions with our Salary In-Hand Calculator.
Gratuity Tax Exemption — ₹20 Lakh Lifetime Limit
For private sector employees covered under the Gratuity Act, the amount received is tax-free up to ₹20 Lakhs. This is a lifetime limit across all employers — meaning if you receive ₹12L from Employer A and later ₹10L from Employer B, only ₹20L total is exempt; the remaining ₹2L is taxable as salary income. Government employees receive full tax exemption with no ceiling.
The ₹20 Lakh limit was raised from ₹10 Lakhs in 2019 and remains unchanged for FY 2025-26. Any taxable portion is added to your gross salary for the year and taxed at your applicable income tax slab rate. Use our Income Tax Calculator to estimate the tax on any taxable gratuity.
How Gratuity Appears in Your CTC
Most Indian employers include gratuity as a component of the CTC (Cost to Company), even though it is only paid out when you leave after 5+ years. The employer-side provision is typically calculated as (Basic × 15 ÷ 26) per year — roughly 4.81% of your annual basic salary. This amount is provisioned by the employer but is not part of your monthly take-home salary.
| Basic Salary / Month | Years of Service | Gratuity Amount | Tax Exempt? |
|---|---|---|---|
| ₹25,000 | 5 years | ₹72,115 | Fully exempt |
| ₹50,000 | 10 years | ₹2,88,462 | Fully exempt |
| ₹1,00,000 | 15 years | ₹8,65,385 | Fully exempt |
| ₹2,00,000 | 20 years | ₹23,07,692 | ₹20L exempt + ₹3.07L taxable |
Gratuity is one of the most underutilised long-term benefits for Indian employees. Understanding its calculation helps you make better decisions about job changes and retirement planning.
Frequently Asked Questions
Common questions about gratuity eligibility, calculation, and tax treatment.
For employees covered under the Payment of Gratuity Act, 1972, the formula is: Gratuity = (15 × Last Drawn Basic Salary + DA × Years of Service) ÷ 26. The 15 represents 15 days of wages, and 26 represents working days in a month (excluding 4 Sundays). For employees not covered by the Act (organisations with fewer than 10 employees), the denominator is 30 instead of 26, resulting in a slightly lower payout.
Any employee who has completed at least 5 years of continuous service with the same employer is eligible. This applies to organisations with 10 or more employees. If the months in the final incomplete year exceed 6, that year is rounded up. In case of death or permanent disability, the 5-year minimum is waived — gratuity is payable regardless of tenure.
For private sector employees covered under the Gratuity Act, the amount received is tax-exempt up to ₹20 Lakhs (lifetime limit across all employers). Any amount above ₹20L is added to your income and taxed at your applicable income tax slab rate. Government employees enjoy full exemption with no ceiling. The ₹20L limit has been in effect since 2019 and continues for FY 2025-26.
Yes. You are entitled to gratuity whether you resign, retire, or are terminated — as long as you have completed 5 years of continuous service. The reason for leaving does not affect eligibility. However, gratuity can be forfeited (partially or fully) if an employee is terminated for misconduct involving moral turpitude that caused damage to the employer's property.
Yes, most employers include gratuity as part of CTC (Cost to Company). It is typically calculated as (Basic × 15 ÷ 26) per year — roughly 4.81% of annual basic. This means your actual in-hand salary is lower than CTC because the employer provisions gratuity. However, gratuity is only paid out when you leave after 5+ years — it's not a monthly benefit you receive.
Gratuity payment is a legal obligation under the Payment of Gratuity Act, 1972. If your employer refuses or delays payment, you can file a complaint with the Controlling Authority (typically the Labour Commissioner of your state). The employer must pay gratuity within 30 days of it becoming due. Delayed payment attracts simple interest at the rate specified by the government.