What Is Gratuity? A Complete Guide for Salaried Employees in India
The One-Line Answer
Gratuity is a lump-sum payment your employer must pay you when you complete 5+ years of continuous service, governed by the Payment of Gratuity Act, 1972. It's a legal right — not a bonus — and is calculated based on your basic salary and years of service.
Leave one day before completing 5 years and you get nothing. Leave one day after 5 years and you get a lakh or more. The 5-year mark matters enormously.
The Two Gratuity Formulas
Which formula applies depends on whether your company is covered under the Payment of Gratuity Act (all organisations with 10 or more employees).
Formula 1: Act-Covered Companies (most Indian companies)
Gratuity = (Basic + DA) × 15 × Years ÷ 26
26 = working days in a month (30 minus 4 Sundays)
15 = 15 days' wage per year of service
Formula 2: Non-Act-Covered Companies
Gratuity = (Basic + DA) × 15 × Years ÷ 30
Denominator is 30 instead of 26, so payout is lower
Real Example
Ramesh has a basic salary of ₹60,000/month and completes 12 years at an Act-covered company:
Gratuity = ₹60,000 × 15 × 12 ÷ 26 = ₹4,15,385
Tax exemption: up to ₹20 lakh
Taxable: ₹0 (fully exempt in this case)
Gratuity Payout by Salary and Years
Basic+DA
5 Years
10 Years
15 Years
20 Years
25 Years
₹30,000
₹86,538
₹1,73,077
₹2,59,615
₹3,46,154
₹4,32,692
₹50,000
₹1,44,231
₹2,88,462
₹4,32,692
₹5,76,923
₹7,21,154
₹80,000
₹2,30,769
₹4,61,538
₹6,92,308
₹9,23,077
₹11,53,846
₹1,20,000
₹3,46,154
₹6,92,308
₹10,38,462
₹13,84,615
₹17,30,769
*Act-covered formula (÷26). All amounts below ₹20L tax exemption limit.
The 6-Month Rounding Rule:
If you have 12 years and 7 months, it rounds UP to 13 years (≥6 months = round up). If you have 12 years and 4 months, it rounds DOWN to 12. Plan your resignation date around this — even 2 months can cost you ₹50,000+ in gratuity.
Tax Treatment of Gratuity
Employee Type
Tax Exemption
Taxable Portion
Government employee
Fully exempt (no limit)
₹0
Private (Act-covered)
Up to ₹20 lakh (lifetime)
Amount above ₹20L
Private (Not Act-covered)
Lower of: (Half month × years), actual gratuity, or ₹20L
Excess over exempt
Note: The ₹20 lakh exemption is a lifetime limit — cumulative across all employers during your entire career. If you receive ₹15L from Company A and ₹8L from Company B, ₹3L is taxable.
Key Rules Every Employee Must Know
Minimum 5 years. Except death or disability — paid regardless of tenure in those cases.
30-day payment deadline. Your employer must pay within 30 days of your exit. Beyond that, 10% simple interest applies on the delayed amount.
Forfeiture rules. Gratuity can only be forfeited for willful omission, fraud, or acts causing financial loss to the employer — not for ordinary termination or performance issues.
Nominee nomination. Always keep your gratuity nominee updated (Form F). Outdated nominations cause legal complications for your family.
Watch Out:
Many private companies include "gratuity provision" in your CTC (typically 4.81% of basic). This is just an accounting line — you only receive it after 5 years of service. If you leave before 5 years, this amount is forfeited. Don't count CTC-included gratuity as actual money until you've served 5 years.
Calculate Your Exact Gratuity Payout
Enter your basic salary and years of service to see your gratuity amount and tax treatment instantly.
Yes, absolutely. Gratuity is payable whether you resign, are retired, retrenched, or terminated (except termination for cause involving financial loss). The only condition is completing 5 continuous years of service. Resignation after 5 years entitles you to full gratuity — it is your legal right under the Payment of Gratuity Act.
Only Basic Pay + Dearness Allowance (DA) is used for gratuity calculation — not HRA, LTA, bonus, performance pay, or other allowances. This is why keeping a higher Basic Pay proportion in your CTC (vs allowances) directly increases your gratuity. If your CTC is ₹12L and basic is ₹3.6L (30%), your gratuity basis is ₹30,000/month — lower than if basic were 50% of CTC.
If your employer refuses to pay or disputes the gratuity amount, file a complaint with the Controlling Authority under the Gratuity Act — typically the Labour Commissioner or Assistant Labour Commissioner in your district. You can also file a claim under the Gratuity Act. If your company has more than 10 employees, they are legally obligated to pay. Interest accrues on delayed payments at 10% per annum.
