Gratuity Formula India 2026-27: 5-Year Rule, 6-Month Rounding & ₹20 Lakh Tax Exemption
What is Gratuity?
Gratuity is a statutory retirement benefit paid by employers to employees who have completed at least 5 years of continuous service. It's governed by the Payment of Gratuity Act, 1972 and is mandatory for any organisation with 10 or more employees. Think of it as the employer's reward for your loyalty — 15 days of salary for every year you worked.
The Gratuity Formula — Two Versions
The number 15 represents 15 days of salary per year of service. The number 26 represents working days in a month (excluding 4 Sundays). Government and certain non-covered employees get 30 days per year instead of 15 — double the benefit.
Gratuity is calculated only on Basic Salary + Dearness Allowance. HRA, special allowance, performance bonus, overtime, and all other components are completely excluded. This is why your gratuity amount is almost always lower than people expect — it's based on basic, not CTC or gross salary.
Real Example — ₹50,000 Basic, 10 Years Service
Those 3 extra months cost ₹28,846. This is why knowing the 6-month rounding rule matters — if you're planning to resign and you're at 10 years 4 months, waiting until 10 years 6 months earns you ₹28,846 for free.
Calculate your exact gratuity
Enter your basic salary, years of service and organisation type — get exact gratuity, tax exemption and eligibility instantly.
Open Gratuity Calculator →The 5-Year Rule — And the Critical Exception
Minimum 5 years of continuous service is required for gratuity eligibility in case of voluntary resignation. No 5 years — no gratuity. Period. But there's one major exception most people don't know:
If an employee dies or suffers permanent disability while in service, gratuity is payable regardless of years worked — even on day one of employment. The nominee or the employee receives gratuity calculated on the actual years served. No 5-year minimum applies in these cases.
The 6-Month Rounding Rule — Explained Simply
The rounding rule applies to months beyond the last complete year:
- Less than 6 months extra → ignored, counted as the lower year
- 6 months or more extra → rounds up to the next full year
So 8 years 5 months = 8 years for calculation. 8 years 6 months = 9 years for calculation. This rule applies for resignation and retirement. For death/disability, actual months served are used.
Gratuity Across Different Service Periods — ₹50,000 Basic
The ₹20 Lakh Tax Exemption — Section 10(10)
Gratuity received by private sector employees is completely tax-free up to ₹20 lakhs under Section 10(10) of the Income Tax Act. Any amount above ₹20 lakhs is taxable at your income slab rate in the year of receipt.
At ₹50,000 basic salary, you'd need to serve 35 years to reach ₹10 lakhs in gratuity — still well under the ₹20L limit. For most private sector employees, gratuity is entirely tax-free. You'd need a basic salary of ₹86,667/month and 35 years of service to hit the ₹20L limit. Government employees enjoy unlimited tax-free gratuity with no upper cap.
When Must the Employer Pay Gratuity?
- Employer must pay within 30 days of resignation/retirement/death
- If delayed, employer must pay simple interest at the government-prescribed rate
- Employee can file a claim with the Controlling Authority under the Gratuity Act if payment is refused or delayed
- Employer must send a gratuity notice within 15 days of receiving the resignation
- Wilful non-payment is a criminal offence under the Act — employer can face imprisonment
File a written application with the Controlling Authority (Labour Commissioner) in your district. Attach your appointment letter, salary slips, and resignation acceptance. The authority can order payment with interest. This is a legal right — you don't need a lawyer to file the initial complaint.
Gratuity vs PF vs Leave Encashment — What You Get on Leaving
When you leave a job after 5+ years, three separate payments may be due:
- Gratuity — statutory benefit, 15/26 × basic × years — tax-free up to ₹20L
- PF withdrawal — your accumulated PF corpus — tax-free if withdrawn after 5 years of continuous service
- Leave encashment — payment for unused earned leave — partially tax-free (up to ₹25L for private sector employees)
Together these three can amount to a significant corpus on a long career exit — especially if you've been with one company for 15+ years at a decent salary.
5 Gratuity Mistakes That Cost People Money
Gratuity is based only on Basic + DA. If your CTC is ₹15L/year but your basic is ₹4L/year (common in startup-style packages with high allowances), your gratuity is calculated on ₹4L — not ₹15L. Always check your appointment letter for the specific basic salary component. A high CTC with a low basic is a gratuity disadvantage.
Some employers offer an ex-gratia payment that's lower than the statutory gratuity amount. Employees often accept this thinking it's equivalent. If you're entitled to ₹3,50,000 under the Act but the employer offers ₹2,00,000 as "ex-gratia," you have every right to file a claim for the full statutory amount. Don't sign any release unless you're confident the ex-gratia equals or exceeds your legal entitlement.
Under Section 7 of the Payment of Gratuity Act, the employee has one year from the date when gratuity became payable to file a claim with the Controlling Authority. If you miss this window, you may lose the ability to enforce your claim. File within 30 days of your notice period ending if the employer hasn't paid — don't wait months hoping they'll "sort it out."