Gratuity in India: Rules, Formula & Tax (2026 Guide)
Gratuity is the one-time lump sum your employer pays when you exit an organisation after serving a qualifying period. For most salaried professionals it is the largest single cheque they will ever receive from an employer outside of stock vesting. This guide explains exactly when you become eligible, the exact formula, how the tax exemption works, and the practical traps that cost employees lakhs of rupees every year.
In This Guide
Who is eligible for gratuity?
The Payment of Gratuity Act, 1972 applies to every factory, mine, oilfield, plantation, port, railway, shop, or establishment with 10 or more employees. If your employer has ever crossed that headcount since starting operations, the Act continues to apply even if the number later falls below 10.
You become eligible for gratuity when you have completed five years of continuous service with the same employer. There are only two situations where the five-year rule is waived: if the employee dies in service, or if they become permanently disabled. In both cases gratuity is payable regardless of service length.
The 4 years + 240 days rule: Several court rulings — most notably Mettur Beardsell Ltd. vs Regional Labour Commissioner — have treated 4 years and 240 days in the fifth year as five continuous years. In practice, if you resign with 4 years and 8 months of service in the right type of establishment, you can legitimately claim gratuity. Smaller employers often deny it because they don't know; get it in writing if you plan to rely on this.
The gratuity formula
The calculation depends on whether your employer is covered under the Act:
Covered under the Act
Gratuity = (Last drawn Basic + DA) × 15 / 26 × Years of service
15/26 is the number of days' salary per completed year — essentially half a month's wages. Years of service are rounded to the nearest full year if the employee has worked more than 6 months in the final year; otherwise rounded down.
Not covered under the Act
Gratuity = (Last drawn Basic + DA) × 15 / 30 × Years of service
Here 15/30 (i.e., half a month calculated on a 30-day month) is used. Only completed years count; any fraction is dropped.
Covered vs non-covered employees
| Aspect | Covered | Non-covered |
|---|---|---|
| Formula divisor | 26 | 30 |
| Fractional year | >6 months rounds up | Always rounded down |
| Statutory ceiling | Rs. 20 lakh | Rs. 20 lakh (tax only) |
| Typical sectors | Most private companies | Some partnerships, very small firms |
Tax exemption rules
Gratuity tax exemption under Section 10(10) works in three buckets:
- Government employees: fully exempt, no upper limit.
- Covered private employees: exempt up to the least of (a) Rs. 20 lakh statutory ceiling, (b) actual gratuity received, or (c) 15 days' salary × years of service using the 26-day divisor.
- Non-covered private employees: exempt up to the least of (a) Rs. 20 lakh, (b) actual gratuity received, or (c) half month's average salary of last 10 months × completed years.
Anything beyond the exempt amount is taxed as salary income at your applicable slab rate. The Rs. 20 lakh ceiling is cumulative across employers over your lifetime — not per job. If you received Rs. 12 lakh exempt from Employer A, only Rs. 8 lakh remains exempt for future employers.
When it is paid
Under the Act, gratuity must be paid within 30 days of becoming payable. If the employer delays, simple interest is due to the employee. The employee or nominee must file Form I with the employer; if the employer does not respond, a claim can be filed with the Controlling Authority (Labour Commissioner) under the Act.
Most salaried employees receive gratuity bundled with their final settlement (F&F), typically 30-45 days after the last working day. A common mistake is resigning without completing the nomination Form F during service — in the unfortunate event of death, the amount then becomes harder for the family to claim.
Worked example
Ritu resigns after 8 years and 7 months of continuous service. Her last drawn Basic + DA is Rs. 60,000/month. Her employer is covered under the Act.
- Years of service (8y 7m → rounds up): 9
- Last Basic + DA: Rs. 60,000
- Gratuity = 60,000 × 15 / 26 × 9 = Rs. 3,11,538
Since the full amount is below the Rs. 20 lakh exempt ceiling and is also below the formula-based limit, Ritu pays no tax on the gratuity. She should also confirm that her Basic on her salary slip matches what HR uses for the calculation — disputes here are the #1 cause of gratuity underpayment.
Common mistakes
- Counting the notice period in service tenure. Notice period served does count, but notice period bought out does not.
- Assuming gratuity is part of CTC. It is contributed to a gratuity fund (LIC group gratuity scheme or a trust) and shown in CTC but is not in-hand cash.
- Accepting a gratuity "capped" at Basic × 15/26. The Rs. 20 lakh ceiling is a tax exemption limit, not a payment ceiling — your employer can pay you more and the excess is just taxed.
- Not filing Form I after leaving. If you don't formally apply within the prescribed window, the employer is not technically in default.
Calculate your gratuity
Use our free calculator to see your exact gratuity based on your Basic and years of service.
Open Gratuity Calculator More GuidesSources & References
Primary sources used to write and fact-check this guide. Updated when official notifications change.
Last reviewed by the AboutAll.in editorial team in April 2026. See our methodology for the full research process.
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