What is Gratuity? Complete Guide + Calculator Formula [2026]
What is gratuity? It's a lump-sum reward paid by employers for long service. Learn the 15/26 formula, eligibility rules, tax limits, and how to calculate your amount.
Gratuity is a one-time, lump-sum payment made entirely by your employer — not deducted from your salary — as a financial reward for completing long-term service. It is a statutory right under the Payment of Gratuity Act, 1972, which means if you meet the eligibility conditions, your employer is legally required to pay it. It is not a discretionary bonus that can be withheld at will.
In practical terms: when you resign after five or more years, retire, become disabled, or pass away while employed, your employer must calculate and release your gratuity — typically within 30 days.
Fast-Scan Summary
| What | Detail |
|---|---|
| Definition | Lump-sum payment by employer to employee for long service |
| Legal basis | Payment of Gratuity Act, 1972 |
| Who pays it | Employer (100%) — never deducted from employee |
| Minimum service | 5 years (permanent); 1 year (fixed-term, post-Nov 2025) |
| Formula | (Basic + DA) × 15 × Years ÷ 26 |
| Tax-free limit | ₹20 lakh (private); ₹25 lakh (Govt) |
| Payment deadline | 30 days from due date |
| Disputes | File Form N with Assistant Labour Commissioner |
What Does Gratuity Mean?
The word gratuity originally means "a gift given freely." In Indian employment law, it means something more precise: a statutory retirement benefit earned through continued loyalty to one employer. It is not a gift — it is a right.
Three things make gratuity distinct from other salary components:
1. It is employer-funded. Unlike Provident Fund (where you and your employer each contribute), gratuity is paid entirely from the employer's pocket. When you see "gratuity" as a line item in your CTC offer letter, that is the employer's provision or liability for you — it has not been transferred to your account and is not available to you until you leave and meet the eligibility criteria.
2. It is not proportional to performance. Gratuity is calculated purely on your last drawn Basic Salary and total years of service. A modest performer who stays 10 years receives more gratuity than an outstanding one who stays 4 years.
3. It is a one-time lump sum. Gratuity is paid once at exit — it is not a monthly pension and does not recur.
Gratuity Formula: How Is It Calculated?
For Employers Covered Under the Gratuity Act (10+ Employees)
Gratuity = (Last Drawn Basic Salary + DA) × 15 × Years of Service ÷ 26
Breaking down the numbers:
- 15 = 15 days' wages per completed year of service (half a month's pay as a loyalty reward)
- 26 = average working days per month (52 Sundays removed from 365 ÷ 12 ≈ 26)
- Basic + DA = only these two components count; HRA, bonuses, allowances are excluded
- Years of service = completed years, with a partial-year rounding rule (see below)
For Employers NOT Covered Under the Act (Fewer Than 10 Employees)
Gratuity = (Basic + DA) × 15 × Years of Service ÷ 30
Using 30 (calendar days) instead of 26 (working days) gives a lower daily wage — and therefore a lower payout. This formula is used when employers choose to pay gratuity voluntarily, since they are not legally obligated.
No DA? Use Basic Salary Alone
Most private sector employees — especially in IT, tech, consulting, BPO, and startups — do not receive a Dearness Allowance. DA is primarily a government-sector component designed to offset inflation. If your salary slip shows no DA, simply treat your Basic Salary as the full calculation base. The formula is identical; DA is treated as zero.
Gratuity Calculator: Worked Examples
Example 1 — Standard Private Sector Employee (No DA)
Priya is a software engineer who resigns after 9 years. Her last drawn basic salary: ₹55,000/month. Her employer (a 500-person IT firm) is covered under the Act.
Gratuity = ₹55,000 × 15 × 9 ÷ 26
= ₹55,000 × 135 ÷ 26
= ₹74,25,000 ÷ 26
= ₹2,85,577
Priya receives ₹2,85,577 — fully tax-free (well under the ₹20 lakh lifetime ceiling).
Example 2 — Manufacturing Employee With DA
Ramesh works at a Pune factory for 14 years. Basic: ₹35,000/month; DA: ₹10,000/month. Employer covered.
Gratuity = (₹35,000 + ₹10,000) × 15 × 14 ÷ 26
= ₹45,000 × 210 ÷ 26
= ₹3,63,462
Ramesh receives ₹3,63,462 — fully tax-free.
Example 3 — Senior Professional Crossing the ₹20 Lakh Cap
Anita, a Chief Financial Officer, retires after 28 years. Basic: ₹1,80,000/month. No DA. Employer covered.
Gratuity = ₹1,80,000 × 15 × 28 ÷ 26
= ₹29,07,692
Formula result: ₹29,07,692. But the statutory ceiling is ₹20 lakh.
- ₹20,00,000 — paid to Anita, fully tax-exempt
- ₹9,07,692 — excess treated as taxable income in the year of receipt; taxed at Anita's income slab
Gratuity Quick Calculator Table (No DA)
| What | Detail |
|---|---|
| Definition | Lump-sum payment by employer to employee for long service |
| Legal basis | Payment of Gratuity Act, 1972 |
| Who pays it | Employer (100%) — never deducted from employee |
| Minimum service | 5 years (permanent); 1 year (fixed-term, post-Nov 2025) |
| Formula | (Basic + DA) × 15 × Years ÷ 26 |
| Tax-free limit | ₹20 lakh (private); ₹25 lakh (Govt) |
| Payment deadline | 30 days from due date |
| Disputes | File Form N with Assistant Labour Commissioner |
Formula: Basic × 15 × Years ÷ 26. Employer covered under the Payment of Gratuity Act.
The Rounding Rule: How Partial Years Are Counted
When your final year of service is incomplete, a rounding rule determines whether it counts as a full year:
- More than 6 months in the final year → rounds up to a full year
- 6 months or less in the final year → rounds down (not counted)
Examples:
| Service Duration | Rounds To | Eligible? |
|---|---|---|
| 4 years 5 months | 4 years | ❌ No (less than 5 years) |
| 4 years 7 months | 5 years | ✅ Yes (rounds up to 5) |
| 9 years 4 months | 9 years | ✅ Yes (final year dropped) |
| 9 years 8 months | 10 years | ✅ Yes (rounds up to 10) |
The 4-Year 240-Day Rule: The Madras High Court (Mettur Beardsell Ltd v. Regional Labour Commissioner) held that an employee who has completed 4 years and 240 working days qualifies as having completed 5 continuous years of service under the rounding provision of the Act. {{Jurisdiction applicability — Madras High Court ruling; binding in Tamil Nadu, persuasive elsewhere}} This is distinct from 4 years and 7 calendar months — 240 working days may actually translate to fewer than 8 months, depending on the calendar.
Gratuity Eligibility: Who Qualifies?
Conditions for Eligibility
To receive gratuity under the Payment of Gratuity Act, three conditions must all be met:
1. Your employer is covered by the Act. The Act applies to any establishment that has employed 10 or more workers on any single day during the preceding 12 months — including factories, mines, oil fields, plantations, ports, railway undertakings, shops, and general establishments. Once covered, an organisation remains covered even if its headcount later drops below 10.
2. You have completed the minimum service period. For permanent employees: 5 continuous years. For fixed-term employees on written contracts (effective November 21, 2025 under the Code on Social Security, 2020): 1 year. For employees who die or become disabled due to accident or disease: no minimum service required.
3. Your employment ends for a qualifying reason. These include: resignation, retirement, superannuation, retrenchment, end of fixed-term contract, death, or permanent disablement. Termination for proven gross misconduct may result in partial or full forfeiture (see below).
Who is NOT Eligible
| Category | Why Not Eligible |
|---|---|
| Employees with < 5 years' service (permanent) | Service threshold not met |
| Apprentices | Excluded by definition under the Act |
| Employees of establishments with < 10 workers | Employer not covered by the Act |
| Dismissed employees (gross misconduct) | Gratuity may be forfeited — partially or fully |
| Those who already resigned before 5 years | No waiver for resignation without qualifying tenure |
What Gets Included — and Excluded — in the Gratuity Calculation Base
| Component | Included? | Notes |
|---|---|---|
| Basic Salary | ✅ Yes | Always included |
| Dearness Allowance (DA) | ✅ Yes | If applicable (mainly manufacturing, PSUs, banks) |
| Retaining Allowance | ✅ Yes | If paid to retain employee during off-season |
| House Rent Allowance (HRA) | ❌ No | Excluded |
| Bonus (any type) | ❌ No | Excluded |
| Overtime | ❌ No | Excluded |
| Special Allowance | ❌ No* | *Subject to New Labour Code 50% rule — see below |
| Commission | ❌ No | Excluded |
| Medical/Transport Allowance | ❌ No | Excluded |
The 50% Rule Under New Labour Codes: Under the Code on Wages, 2019 (effective November 21, 2025), all statutory benefit calculations — including gratuity — must be based on wages that equal at least 50% of total CTC.If your Basic + DA is currently below 50% of your CTC, your employer is legally required to restructure — and your effective gratuity base increases accordingly.
Gratuity and Tax: The 3-Tier Exemption System
The tax treatment of gratuity depends entirely on what type of employer you work for. The exemption rules are governed by Section 10(10) of the Income Tax Act, 1961.
Tier 1: Government Employees (Central + State + Local Bodies)
Gratuity received on retirement or death is entirely tax-exempt with no ceiling for death gratuity. For retirement and resignation, the ceiling is ₹25 lakh {{linked to DA revisions under CCS Pension Amendment Rules 2025}}. Any amount above ₹25 lakh is taxable.
Tier 2: Private Employees Covered Under the Gratuity Act
The tax-exempt amount is the lowest of:
- Actual gratuity received
- ₹20 lakh (lifetime ceiling across all employers combined) {{ No Budget 2026 change}}
- Statutory formula amount: (Basic + DA) × 15 × Years ÷ 26
Critical: The ₹20 lakh ceiling is a lifetime aggregate. If you received ₹8 lakh gratuity from a previous employer, only ₹12 lakh remains tax-free from future employers.
Tier 3: Private Employees NOT Covered Under the Act
The tax-exempt amount is the lowest of:
- Actual gratuity received
- ₹20 lakh lifetime ceiling
- Half-month's average salary (computed over the last 10 months) × years of completed service
Summary:
| Employee Type | Tax-Free Ceiling | Formula for Exemption |
|---|---|---|
| Government / PSU | ₹25 lakh | Lowest of actual, limit, formula |
| Private (Act-covered) | ₹20 lakh | Lowest of actual, limit, 15/26 formula |
| Private (Not Act-covered) | ₹20 lakh | Lowest of actual, limit, half-month average formula |
| Death / Disability (any) | Fully exempt | No ceiling applies |
Gratuity Forfeiture: When Can Your Employer Withhold It?
Your employer cannot withhold gratuity arbitrarily. However, two situations allow partial or full forfeiture under Section 4(6) of the Payment of Gratuity Act:
Situation 1 — Loss or Damage to Employer Property: If your service is terminated because you caused damage or loss to your employer's property, gratuity can be forfeited only to the extent of that proven loss. A ₹50,000 loss does not justify forfeiting ₹5 lakh of gratuity.
Situation 2 — Misconduct Involving Moral Turpitude: Gratuity may be forfeited wholly or partially if your service is terminated for an act that constitutes an offence involving moral turpitude — such as fraud, theft, embezzlement, or falsification of records.
The 2025 Supreme Court Ruling You Need to Know
In Western Coal Fields Ltd. v. Manohar Govinda Fulzele (decided February 17, 2025), the Supreme Court of India ruled that an employer can forfeit gratuity for moral turpitude-based misconduct WITHOUT requiring a criminal conviction. {{SOURCE: 2025 INSC 233}}
This overturned the earlier Union Bank of India v. C.G. Ajay Babu (2018) position that had required a criminal conviction before forfeiture was permissible — effectively making forfeiture nearly impossible since criminal trials take years.
What the court held:
- A disciplinary inquiry finding is sufficient — criminal court proceedings are not required
- The disciplinary authority must determine whether the misconduct would normally constitute an offence involving moral turpitude
- Forfeiture must be proportionate to the severity of the misconduct
- The employee must be given notice and an opportunity to respond before any forfeiture decision
Practical outcome from the same case:
- An employee who obtained employment through a forged date-of-birth certificate → 100% gratuity forfeited
- MSRTC conductors who misappropriated small fare amounts → only 25% forfeited, 75% released
Important safeguard: Forfeiture is never automatic. Even if you are dismissed for gross misconduct, your employer must follow due process, issue a show-cause notice, and calculate any forfeiture proportionately. Arbitrary full forfeiture without notice is unlawful.
How to Apply for Gratuity: Forms and Process
The Payment of Gratuity Act prescribes specific forms. These are available for download from the official Ministry of Labour & Employment website (labour.gov.in).
| Form | Who Uses It | Purpose |
|---|---|---|
| Form F | Employee (on joining / within 1 year) | Nominate one or more persons to receive gratuity in case of death |
| Form H | Employee | Update or change nomination details |
| Form I | Employee (at exit) | Apply for gratuity from employer after resignation / retirement |
| Form J | Nominee or legal heir | Apply for gratuity in case of employee's death |
| Form K | Legal heir (no nomination filed) | Apply for gratuity when no Form F exists |
| Form N | Employee / Nominee | File a dispute with the controlling authority (Assistant Labour Commissioner) |
The Form F Problem: Most employees never file Form F after joining. Without a nomination, gratuity in the event of death is paid to the employee's legal heirs — which can require court proceedings and family disputes that delay payment for months or years. File Form F within your first year of employment.
Timeline After You Submit Form I
- Day 0 — You submit Form I (application for gratuity) to your employer
- Within 15 days — Employer acknowledges receipt and specifies the amount payable
- Within 30 days — Full payment must be made
- Beyond 30 days — Employer must pay simple interest on the delayed amount at the applicable rate.
- If employer disputes — They must specify reasons in writing; you may then file Form N with the controlling authority
What Happens If Your Employer Refuses to Pay Gratuity?
Non-payment of gratuity is a criminal offence under the Payment of Gratuity Act. Here is the penalty structure:
| Violation | Penalty |
|---|---|
| Non-payment of gratuity to eligible employee | Imprisonment of 6 months to 2 years, or fine, or both |
| Making false statements to avoid paying gratuity | Imprisonment up to 6 months, or fine up to ₹10,000, or both |
| Obstruction of controlling authority | Fine |
Under the new Labour Codes effective November 21, 2025, many routine procedural violations have been decriminalized — but non-payment of statutory gratuity is explicitly retained as a serious offence that can attract imprisonment. {{Under Code on Social Security, 2020}}
How to file a complaint:
- Submit Form N to the Assistant Labour Commissioner in your district (the "controlling authority")
- Application is free of charge
- The authority may conduct a summary inquiry and issue a payment order
- If the employer still does not comply, the matter escalates to the appellate authority (typically the Deputy Labour Commissioner)
Gratuity vs. Ex-Gratia: What's the Difference?
Many employees confuse these two terms. They are fundamentally different:
| Factor | Gratuity | Ex-Gratia |
|---|---|---|
| Legal basis | Statutory right under the Gratuity Act | Voluntary payment — no law requires it |
| Compulsory? | Yes — employer cannot refuse if eligible | No — entirely at employer's discretion |
| Formula | Fixed: 15/26 formula | No formula — employer decides the amount |
| Who pays | Employers covered by the Act | Any employer (even below 10 employees) |
| Tax | Exempt up to ₹20–25 lakh | Taxable as income (no special exemption) |
| Can be withheld? | Only in specific forfeiture situations | Any time, for any reason |
When companies say "we'll pay ex-gratia instead of gratuity": This is a red flag if you are eligible under the Act. An employer covered by the Act cannot substitute ex-gratia for statutory gratuity. They may pay both (gratuity + additional ex-gratia), but not replace one with the other.
Gratuity in Your CTC: The Illusion You Need to Understand
Almost every corporate offer letter in India lists gratuity as a CTC component, typically calculated as 4.81% of your annual Basic Salary (which is 15/26 ÷ 12 months). This creates a subtle illusion worth understanding:
Gratuity in CTC ≠ money you will receive.
It is the employer's annual provision for the liability they will eventually owe you. This money is not deposited in your account, not accessible to you, and not yours to keep unless you meet the eligibility criteria. If you resign in year 3, the gratuity "shown" in your CTC for all 3 years simply lapses.
Why do companies show it in CTC? It is a standard practice to show the total "cost" the company incurs for your employment. It also makes the CTC figure look larger — an ₹8 lakh basic translates to ₹38,480/year in gratuity provision (4.81%), adding to the headline number.
Gratuity for Specific Situations
If You Are a Fixed-Term Employee (Post-November 2025)
Under the Code on Social Security, 2020 (effective November 21, 2025), fixed-term contract employees who complete 1 continuous year of service (minimum 240 working days) are eligible for pro-rata gratuity at the end of their contract. The standard 5-year rule does not apply to them. The payout is calculated using the same 15/26 formula.
If You Die During Employment
Gratuity is paid to your nominee (as named in Form F) — or to your legal heirs if no nomination exists — irrespective of how long you worked. There is no minimum service requirement. The gratuity is fully tax-exempt for the recipient with no ceiling. Your nominee should submit Form J; legal heirs (without nomination) use Form K.
If Your Company Is Taken Over or Merged
Service continuity is protected. If your company is acquired and you continue employment with the new entity without a break, your total service (old company + new company) is counted for gratuity purposes. If there is a break — i.e., you are technically terminated and rehired — only service from the rehire date counts.
If You Are a Part-Time or Contractual Employee
Workers on a company's own payroll (even part-time) are covered if the establishment employs 10+ workers. Contract workers employed through a contractor may also be eligible — the contractor (not the principal employer) is responsible for their gratuity. {{ Principal employer liability under new Labour Codes}}
Not For You If...
This guide covers private sector employees under the Payment of Gratuity Act, 1972. Consult separate resources if you are:
- A Central or State Government employee — you follow the Central Civil Services (Pension) Rules with a ₹25 lakh ceiling, different formulas for service/death/retirement gratuity, and NPS-specific amendments under CCS (Payment of Gratuity under NPS) Amendment Rules, 2025.
- A Defence or Paramilitary employee — separate pension and gratuity rules apply entirely.
- A Domestic worker — governed by a different legal framework.
- An employee in Jammu & Kashmir — historically, the Gratuity Act applied differently in J&K; verify current applicability under post-Article 370 changes.
- A gig worker or platform worker — not covered by traditional gratuity under the Gratuity Act; instead, aggregator platforms must contribute 1–2% of annual turnover to a social security fund under the new Labour Codes.
Frequently Asked Questions
What is gratuity in simple terms?
Gratuity is a lump-sum cash payment your employer must make to you when you leave — provided you have worked for at least 5 years (or 1 year on a fixed-term contract after November 2025). It is funded entirely by your employer, not deducted from your salary. The amount depends on how long you worked and what your last drawn basic salary was, calculated using the formula: Basic × 15 × Years ÷ 26.
What is the 15/26 rule in gratuity?
In the gratuity formula, 15 represents 15 days' wages awarded per completed year of service — half a month's salary as a loyalty reward. 26 represents the average number of working days in a month (excluding 52 Sundays from a 365-day year, divided by 12). Dividing your monthly salary by 26 gives your daily wage rate; multiplying by 15 gives you the reward for one year. This ratio appears as the fraction 15/26 in the standard formula.
Is gratuity calculated on gross salary or basic salary?
Gratuity is calculated only on Basic Salary + Dearness Allowance (DA). Gross salary, CTC, HRA, bonuses, special allowances, overtime, and commissions are all excluded. If you do not receive DA (common in IT and private services sector), only your Basic Salary is used as the calculation base.
Can my employer refuse to pay gratuity?
No — if you are eligible under the Payment of Gratuity Act, your employer is legally required to pay. Non-payment is a criminal offence attracting imprisonment of 6 months to 2 years. The only legal grounds for withholding are partial or full forfeiture in cases of proven misconduct involving moral turpitude or damage to employer property — and even then, the employer must follow due process and the forfeiture must be proportionate.
What happens to gratuity if I resign before 5 years?
For permanent employees, gratuity is forfeited if you leave before completing 5 years — except in cases of death or permanent disablement, where the service requirement is fully waived. Fixed-term employees on written contracts (post-November 2025) are eligible after 1 year. There is no partial gratuity payout for, say, 4 years and 3 months of service — the threshold is binary for permanent employees.
Is gratuity part of my CTC?
Yes — most Indian employers include a gratuity provision in the CTC at 4.81% of annual basic salary. However, this is the employer's accounting provision, not money deposited in your account. It becomes payable only when you exit and meet the eligibility criteria. Many employees miscalculate their take-home by treating CTC gratuity as accessible income.
What is the maximum gratuity a private employee can receive tax-free?
The lifetime tax-free limit is ₹20 lakh for private sector employees covered under the Payment of Gratuity Act, under Section 10(10)(ii) of the Income Tax Act. Gratuity from all employers combined counts toward this lifetime ceiling. Any cumulative receipt above ₹20 lakh is taxed at your income slab rate. Government employees have a higher ceiling of ₹25 lakh.