Gratuity — Frequently Asked Questions
What is the gratuity formula?+
For employees under Gratuity Act (private sector with 10+ employees): Gratuity = (Last Basic+DA × 15 × Completed Years) / 26. The 26 represents working days in a month. If you have 6+ additional months beyond completed years, round up to next full year. For government employees: Gratuity = (Last Basic+DA × Completed Quarters × 0.25), capped at ₹20L.
Is gratuity tax-free?+
For private sector employees under the Gratuity Act: tax-free up to ₹20 lakh (revised from ₹10L in 2018). For government employees: fully tax-free (no cap). Amount above ₹20L is taxable. The tax-free limit is a lifetime limit — multiple gratuities from different employers add up to this ₹20L cap.
Am I eligible for gratuity?+
You are eligible if: (1) you have completed 5 years of continuous service with the same employer, (2) your employer has 10 or more employees. Exception: if an employee dies or is disabled, gratuity is payable even before 5 years. Gratuity is payable on: retirement, resignation, termination, or death.
What counts as "continuous service" for the 5-year eligibility?+
Continuous service includes periods of authorized leave, sick leave, layoff, or strike that don't break the employment relationship. Courts have also held that an employee who has worked 4 years and 240+ days in the 5th year (i.e., just under 5 full years) can still be treated as having completed 5 years of continuous service for gratuity purposes — this is a commonly litigated grey area worth knowing about.
Can an employer deny or reduce gratuity?+
An employer can only forfeit gratuity, wholly or partly, if the employee's service was terminated for an act of willful omission or negligence causing damage/loss to the employer, riotous or disorderly conduct, or an offense involving moral turpitude committed during employment. Simple resignation, poor performance, or a routine termination does not permit forfeiture of an otherwise-earned gratuity.
Does gratuity apply to contract or fixed-term employees?+
Yes — the 2018 amendment to the Payment of Gratuity Act extended eligibility to fixed-term employees on a pro-rata basis, even if they haven't completed 5 years, provided their contract has genuinely ended (not renewed) and other conditions of the Act are met. Regular contract/consultant arrangements where there's no direct employer-employee relationship are typically excluded — check your specific contract classification.
Gratuity Calculator India 2026 — Understanding the 15/26 Formula
Gratuity is a lump-sum, one-time payment made by an employer to an employee as a token of appreciation for long service, governed by the Payment of Gratuity Act, 1972. It's not a benefit you contribute to like PF — it's entirely employer-funded and becomes payable when you leave after at least 5 years of continuous service (or earlier, in case of death or disability).
Worked Example: 10 Years of Service at ₹50,000 Basic+DA
For a private-sector employee with a last drawn Basic+DA of ₹50,000/month and 10 completed years of service, the formula is: Gratuity = (₹50,000 × 15 × 10) / 26 = ₹2,88,462. The "15" represents 15 days' wages for each completed year, and "26" represents the standard number of working days in a month used for this calculation (not calendar days). Since this falls well under the ₹20 lakh tax-free limit, the entire amount is received tax-free.
Private Sector vs Government Formula
| Private Sector (Gratuity Act) | Government Employees |
|---|
| Formula | (Basic+DA × 15 × Years) / 26 | Based on completed 6-month quarters, per Central Civil Services rules |
| Tax-free limit | ₹20 lakh (lifetime, across employers) | Fully tax-free — no cap |
| Minimum service | 5 years | 5 years (with some exceptions for death/disability) |
A Note on the ₹20 Lakh Exemption
The ₹20 lakh tax-free ceiling (raised from ₹10 lakh in 2018) is a lifetime limit across all employers, not a per-job limit. If you've already claimed gratuity exemption on an earlier job, that amount reduces how much of your next gratuity payout can be claimed tax-free. Keep records of prior gratuity exemptions claimed when filing your return.