What Is Gratuity?
Gratuity is a lump sum payment made by an employer to an employee as a gesture of gratitude for services rendered. It is governed by the Payment of Gratuity Act, 1972, which applies to every establishment with 10 or more employees (factories, mines, oilfields, plantations, ports, railways, shops, and establishments).
Once the Act applies to an establishment, it continues to apply even if the number of employees falls below 10.
Eligibility — The 5-Year Rule
To be eligible for gratuity, an employee must have completed at least 5 years of continuous service with the same employer. However, there are important exceptions:
- Death or disability: Gratuity is payable regardless of tenure — even 1 year of service qualifies
- 4 years + 240 days: The Supreme Court (Surinder Singh Saroj case) ruled that if you have completed 4 years and 240 working days, it counts as 5 years for gratuity purposes
- Seasonal employees: 4 years + 190 days is treated as 5 years
- Contract/fixed-term employees: If the total period of service (even across renewals) exceeds 5 years, gratuity is payable
The Gratuity Formula
Where:
Last Drawn Salary = Basic Pay + Dearness Allowance
Years of Service = Completed years (6+ months rounded up)
26 = Working days in a month (as per the Act)
The factor 15/26 means the employee gets 15 days' wages for every completed year of service, based on a 26-day working month.
Worked Example — 12 Years of Service
📋 Employee Details
| Parameter | Value |
|---|---|
| Last drawn Basic Salary | ₹60,000/month |
| Dearness Allowance (DA) | ₹10,000/month |
| Total Service | 12 years 7 months |
| Completed Years (rounded) | 13 years (7 months > 6, rounded up) |
Gratuity = (15 × ₹70,000 × 13) ÷ 26 = ₹5,25,000
Rounding of Service Years
The Act specifies that any service period exceeding 6 months in the last year is rounded up to the next full year:
- 8 years 3 months → 8 years (3 months < 6)
- 8 years 7 months → 9 years (7 months > 6)
- 10 years 6 months → 11 years (6 months = rounded up)
Gratuity Tax Treatment
The tax treatment depends on who you are:
- Government employees: Gratuity is fully exempt from income tax under Section 10(10)(i)
- Private sector (covered under Gratuity Act): Exempt up to the minimum of:
- Actual gratuity received
- ₹20,00,000 (the current statutory limit)
- 15/26 × last drawn salary × years of service
- Private sector (NOT covered under the Act): Exempt up to the minimum of:
- Actual gratuity received
- ₹20,00,000
- ½ × average salary of last 10 months × years of service
⚠️ The ₹20 Lakh Lifetime Limit
The ₹20 lakh exemption is a cumulative lifetime limit across all employers. If you received ₹8 lakh gratuity from your previous employer, only ₹12 lakh of the next gratuity is exempt. Keep track of this across job changes.
When Can Gratuity Be Forfeited?
An employer can forfeit gratuity (partially or fully) only in very specific circumstances:
- Termination for riotous or violent behaviour on the employer's premises
- Termination for an offence involving moral turpitude (if convicted by a court)
- If the employee's act or omission caused damage or loss to the employer — forfeiture limited to the extent of the damage
Resignation, redundancy, retirement, or performance-related termination are NOT grounds for forfeiting gratuity.
💡 Gratuity Is Separate from PF
Gratuity is entirely employer-funded — no amount is deducted from the employee's salary for gratuity. It is separate from EPF (Provident Fund), which has both employee and employer contributions. You are entitled to both gratuity and full PF withdrawal upon leaving after 5 years.
Gratuity for Employees Not Covered Under the Act
Even if your employer is not covered by the Payment of Gratuity Act (fewer than 10 employees), many companies still pay gratuity as part of their compensation policy. In such cases:
- The formula may differ — often based on the employer's internal policy
- Tax exemption is calculated using the "half-month salary" formula: ½ × average salary of last 10 months × completed years
- "Salary" here means Basic + DA + commission based on fixed percentage of turnover
Calculate Your Gratuity Amount
Enter your salary and years of service — get instant gratuity amount, tax-exempt portion, and taxable amount.
Use Gratuity Calculator →How We Research and Update This Guide
We cross-check formulas, slabs, and examples against published government, regulator, lender, and scheme documentation before updating the page.
- Official government notifications, tax guidance, and scheme rules are checked before formulas or explanatory text are updated.
- Worked examples are recalculated manually and matched against the on-page tool where relevant.
- Whenever rules change, the page date and examples should be revised together to avoid stale guidance.
Frequently Asked Questions — Gratuity Calculation
You must complete a minimum of 5 years of continuous service with the same employer to be eligible for gratuity. However, the Supreme Court has clarified that 4 years and 240 days (or 190 days for seasonal establishments) counts as 5 years. If you die or become disabled, gratuity is payable regardless of tenure.
For government employees, gratuity is fully exempt from income tax. For private sector employees covered under the Gratuity Act, the exemption is the least of: (1) actual gratuity received, (2) ₹20 lakh (raised from ₹10L in 2019), or (3) 15/26 × last drawn salary × years of service. Any amount above the exemption limit is taxable as salary income.
The Payment of Gratuity Act caps the maximum gratuity at ₹20 lakh. However, employers can voluntarily pay more than this limit — many large companies and MNCs pay higher gratuity as part of their compensation policy. The ₹20 lakh cap applies only for the tax exemption calculation.
For employees covered under the Gratuity Act, the formula uses "last drawn salary" which means Basic Salary + Dearness Allowance (DA) only. HRA, bonus, overtime, commissions, and other allowances are NOT included. For employees not covered under the Act, the employer may define salary differently in their policy.
If you have completed 5+ years and the organisation has 10+ employees, gratuity is a statutory right under the Payment of Gratuity Act. The employer cannot refuse. Gratuity can only be forfeited (partially or fully) if the employee is terminated for misconduct involving violence, moral turpitude, or causing damage to employer property.