What is gratuity?
Gratuity is a one-time lump-sum payment from your employer when you leave the company — but only if you've completed 5 continuous years of service (4 years 240 days qualifies in some legal interpretations). It's mandated by the Payment of Gratuity Act, 1972 for organizations with 10+ employees, and it's a meaningful number: for someone leaving after 10 years on a ₹50,000/month basic, gratuity is roughly ₹2.88 lakh — tax-free up to ₹20 lakh lifetime.
For most Indian salaried employees, gratuity sits quietly in the CTC line items, gets ignored until it's paid out, and is a small but welcome bonus when you switch jobs after a long tenure.
How is gratuity calculated?
The statutory formula:
Gratuity = (Last drawn Basic + DA) × 15 × Years of service / 26
Where:
- 15 = 15 days' wages per completed year of service
- 26 = number of working days in a month (gratuity assumes 26-day months)
If service > 6 months in the final year, it's rounded up. So 7 years 7 months = 8 years.
Worked example
Engineer leaves a company after 10 years of continuous service. Last drawn Basic + DA: ₹50,000/month.
Gratuity = 50,000 × 15 × 10 / 26
= 7,500,000 / 26
= ₹2,88,461
Tax treatment: fully exempt up to ₹20 lakh lifetime (Government employees: fully exempt; private employees: up to ₹20 L total across all employers).
When are you eligible?
| Service period | Gratuity? |
|---|---|
| Less than 5 years | ❌ Not eligible (with exception for death/disability) |
| 5 years exactly | ✅ Eligible |
| Each year after 5 | Adds 15 days' wages |
| Death/permanent disability | ✅ No 5-year requirement |
The 5-year rule is the most common surprise — people who leave at 4 years 11 months get nothing.
Components and inputs explained
Last drawn salary
Basic + Dearness Allowance only. NOT gross salary, NOT special allowance, NOT bonuses. For most private-sector employees, this is roughly 40% of CTC.
Years of service
Continuous years with the same employer. Round up if > 6 months. Transferring within the same company (e.g. legal entity change) preserves continuity in most cases.
Common variants
| Scenario | Calculation |
|---|---|
| Standard private employee | Formula above (15/26) |
| Government employee | Different formula (no 26 divisor); often higher |
| Seasonal worker | 7 days' wages per year instead of 15 |
| Employee covered by Payment of Gratuity Act | Capped at ₹20 lakh tax-free |
| Employee NOT covered (e.g. firm < 10 employees) | Voluntary; some companies still pay |
Tax implications
- Up to ₹20 lakh lifetime tax-free (across all employers)
- Beyond ₹20 lakh: fully taxable as salary in the year received
- Government employees: fully tax-free
- Death gratuity: fully tax-free regardless of amount
Considerations
- Gratuity sits in your CTC every year but you only get paid on exit. Don't budget on it monthly.
- Provisioning: large employers fund a gratuity trust managed by LIC; smaller employers pay from current revenue (more delay).
- Multiple short stints: each employer's gratuity is calculated separately, but the ₹20 L tax exemption is lifetime cumulative.
Limitations
- The calculator uses the Payment of Gratuity Act formula. Government employees / contractors use different formulas.
- Doesn't model the ₹20 L tax cap if you have prior gratuity payouts.
- Doesn't model defined-benefit pension components (separate from gratuity).
Related calculators
- EPF — workplace retirement saving
- Salary Calculator — CTC to in-hand
- NPS — voluntary retirement
- Retirement Planner — total corpus
- Form 16 — annual in-hand
- Income Tax — tax computation
Final note. Gratuity is one of the few financial benefits where just staying employed is the qualifier. Cross the 5-year mark before switching jobs unless the new offer's premium exceeds 25% — otherwise you're leaving real money on the table. This calculator computes the number; the discipline is staying long enough to earn it.