Gratuity Calculation: Formula and Rules in India (2026)

Gratuity is a lump sum an employer pays to an employee as a thank-you for long service, given when the person leaves after putting in a qualifying number of years. Unlike your monthly salary or your PF, you do not contribute to it from your pay; the employer funds it. It is one of those numbers most people never work out until they are about to leave a job, and then it suddenly matters a great deal. This guide explains the formula in plain terms, walks through worked examples for different lengths of service, covers who is eligible, shows how the tax exemption works, and clears up how gratuity differs from other end-of-service money.

What gratuity is and who pays it

Gratuity is a statutory benefit under the Payment of Gratuity Act for employees of establishments that the law covers, typically those with ten or more employees. The employer pays it out of its own funds when an eligible employee leaves, whether by resignation, retirement, or in the sad cases of death or disablement. The idea is simple: the longer you stay and serve, the larger the reward when you go. Because it is the employer's cost and not a deduction from your salary, gratuity is genuinely additional money, which is why it is worth understanding how the figure is built.

The five-year eligibility rule

The core condition is continuous service. As a general rule you must complete five years with the same employer to become eligible for gratuity. This is why the five-year mark is such a talked-about milestone in a career: cross it and a whole benefit opens up that did not exist the day before. The five-year requirement is relaxed in cases of death or disablement, where gratuity can be payable even without five completed years, with the amount worked out on the service put in. Short of five years and leaving voluntarily, you generally do not qualify, so if you are close to the threshold it can be worth knowing exactly where you stand.

The formula, in plain terms

For employees covered by the Act, the widely used formula is:

Gratuity = (last drawn salary times 15 times completed years of service) divided by 26.

Two parts of this need unpacking. First, "salary" here means basic pay plus dearness allowance, not your full cost-to-company or your take-home. Second, the 15 and the 26 come from the idea of paying fifteen days of wages for each completed year, where a month is treated as 26 working days. So the formula is really fifteen days of your daily wage for every year you served, and your daily wage is your monthly basic-plus-DA divided by 26.

Worked examples

Numbers make this far clearer than words. In each case below, "salary" means the last drawn basic pay plus dearness allowance. These figures are illustrative, chosen only to show the maths.

Example 1: ten years of service. Suppose the last drawn salary is 30,000 rupees a month and the employee completed ten years. Gratuity = (30,000 times 15 times 10) divided by 26 = 4,500,000 divided by 26, which is about 1,73,077 rupees.

Example 2: six years of service. Suppose the last drawn salary is 40,000 rupees and the employee completed six years. Gratuity = (40,000 times 15 times 6) divided by 26 = 3,600,000 divided by 26, which is about 1,38,462 rupees.

Example 3: a part-year and the six-month rule. Suppose the last drawn salary is 25,000 rupees and the employee worked seven years and eight months. Because eight months is more than six, the final year is usually counted as a full year, so service is treated as eight years. Gratuity = (25,000 times 15 times 8) divided by 26 = 3,000,000 divided by 26, which is about 1,15,385 rupees. Had the employee worked seven years and four months, the extra four months would typically be ignored and service counted as seven years.

A quick reference table

The same 15 by 26 formula, applied at one salary level across different tenures, shows how the payout grows with service. Using a last drawn salary of 30,000 rupees:

The pattern is linear: every extra year adds the same slice, so the benefit of staying compounds steadily across a long tenure. Remember the salary used is basic plus DA, so a higher basic component raises the figure.

The rounding of months

Years of service are counted in completed years, and the last part-year is where people get confused. Under the common practice for covered employees, more than six months in the final year is rounded up to a full year, while six months or less is dropped. So seven years and seven months usually counts as eight, but seven years and five months counts as seven. This single rule can change your gratuity by a full year's worth, which is why the exact date you leave can matter. Employers can differ slightly in how they apply rounding, so it is worth confirming with your HR team how they count.

How the tax exemption works

Gratuity carries a tax exemption up to a limit, so a large part of it often reaches you tax-free. The exempt amount is worked out as the least of three things: the actual gratuity you received, the amount that the statutory formula gives, and the notified ceiling set by law. Whatever is the lowest of those three is exempt, and anything above it is taxable as salary. The ceiling has been revised over the years, so the exact figure matters and you should confirm the current limit rather than relying on an old number. For many employees with moderate salaries and normal tenures, the whole gratuity falls within the exempt range, but higher earners with long service can cross the ceiling and see part of it taxed.

How gratuity differs from PF and other dues

It is easy to lump all end-of-service money together, but gratuity is distinct. Your PF is money you and your employer both contributed month by month, which you withdraw or transfer when you leave. Leave encashment is payment for unused leave. Notice pay and final salary settle your last working period. Gratuity is different from all of these: it is a reward funded entirely by the employer for completing qualifying service, worked out by the 15 by 26 formula rather than by contributions. When you leave, these amounts are often paid together in a full and final settlement, but each is calculated on its own rules, so it helps to see them as separate lines rather than one pot.

The bottom line

Gratuity rewards long service with a lump sum the employer funds, calculated as last drawn basic-plus-DA times fifteen, times completed years, divided by twenty-six, once you cross five years of continuous service. The six-month rounding rule and the tax exemption ceiling both affect the final figure, and the ceiling changes over time, so confirm the current limit before you count on a number. If you run a business and want gratuity, PF and salary all handled in one place, IndiaCRM does payroll in a free app. See payroll features, read our salary slip format guide, or get the mobile app and set up your team today.