Gratuity in India: Payment of Gratuity Act, 1972

What is Gratuity?

Gratuity is a lump-sum payment from your employer recognizing long service. It's not a bonus — it's a legal entitlement under the Payment of Gratuity Act, 1972 for employees of establishments with 10 or more people.

Most organized-sector employees in India are covered automatically.

When You Get It

Gratuity is payable when your employment ends due to:

Retirement
Resignation (after 5+ years of service)
Death or disablement (5-year minimum is waived)
Termination (not for misconduct)

The 5-year minimum service rule is important: quit before 5 years and you get nothing. Recent court rulings accept 4 years 240 days as qualifying — check with HR if you're close.

The Formula

For employees covered under the Act (most private-sector):

Gratuity = (Last drawn salary × 15 × Years of Service) / 26

For employees not covered (small firms, contractors):

Gratuity = (Last drawn salary × 15 × Years of Service) / 30

"Last drawn salary" = Basic + Dearness Allowance only. HRA, bonus, allowances are excluded.

Why 26? The Act defines salary for gratuity as 15 days' wages for each completed year, based on a 26-working-day month. Non-Act employers use 30 days (calendar month).

Worked Example

You earn ₹80,000 (Basic + DA) and worked for 10 years at a 500-person company (Act-covered):

Gratuity = (80,000 × 15 × 10) / 26 = ₹4,61,538

If the same employer wasn't covered (divisor 30):

Gratuity = (80,000 × 15 × 10) / 30 = ₹4,00,000

The Act's 26-day calculation gives you ~15% more than non-Act employers.

The ₹20 Lakh Tax Cap

Gratuity is tax-free up to ₹20 lakh (current Finance Act rule). Anything above ₹20 lakh is taxable as salary income.

Example: a 20-year veteran earning ₹5L/month Basic+DA at an Act-covered firm:

Gratuity: (5,00,000 × 15 × 20) / 26 = ₹57.7 lakh
Tax-exempt portion: ₹20 lakh
Taxable portion: ₹37.7 lakh → taxed at your slab rate

This cap has risen over time (₹10L in 2010, ₹20L in 2018) and is indexed to Finance Act changes. For government employees, the full amount is tax-exempt regardless of ceiling.

Fractional Years Rule

If your service includes a partial year of more than 6 months, round UP. Less than 6 months rounds DOWN.

10 years 7 months → counts as 11 years
10 years 3 months → counts as 10 years

Common Mistakes

Waiting for payment beyond 30 days — employer must pay within 30 days of your last day. Interest accrues after.
Confusing "salary" with CTC — gratuity uses Basic+DA only. Not your whole CTC.
Assuming contractors get it — direct employees only. Freelancers / contractors via agencies usually don't qualify under the Act.
Not filing Form I — you must formally claim gratuity from the employer (Form I under the Act) if they haven't paid automatically.

Use our Gratuity Calculator to estimate your payout. Pair it with the Income Tax Calculator to see the tax impact if your gratuity crosses ₹20L.