Gratuity Calculation in India 2026: How Much Are You Owed and When?
Most employees vaguely know that "you get gratuity after 5 years." But they rarely calculate what that actually means in rupees — or know that the 5-year rule has an important exception. If you've worked 4 years and 240 days, you may already qualify. Here's the complete picture.
The Gratuity Formula
Under the Payment of Gratuity Act, 1972, the formula is:
Gratuity = (Last drawn basic salary + DA) × 15/26 × Number of completed years of service
Where 15 represents 15 days' wages, and 26 represents working days in a month (total days minus 4 Sundays).
Worked Examples at Different Salary Levels
| Last Basic+DA | Service (Years) | Gratuity Payable |
|---|---|---|
| ₹40,000/month | 5 | ₹1,15,385 |
| ₹40,000/month | 10 | ₹2,30,769 |
| ₹80,000/month | 10 | ₹4,61,538 |
| ₹1,50,000/month | 15 | ₹12,98,077 |
| ₹2,00,000/month | 20 | ₹23,07,692 |
Note: The maximum gratuity payable under the Act is ₹20 lakh. This cap was raised from ₹10 lakh in 2018. Many private companies pay above this as an ex-gratia, but the statutory maximum under the Act is ₹20 lakh.
The 4 Years 240 Days Rule — The Exception Most People Miss
The Madras High Court (upheld by the Supreme Court) ruled that an employee completing 4 years and 240 days (approximately 4 years and 8 months) qualifies for gratuity — because a working year under the Act is considered complete once 240 days of service have been rendered in that year.
Practical implication: If you join on April 1, 2020 and leave on November 30, 2024 — that's 4 years and 8 months. The 5th year has 240+ working days. You are entitled to gratuity for 5 years, not 4.
When Is Gratuity Payable?
- On resignation or retirement after 5+ years (or 4 years 240+ days)
- On death or disablement — paid to nominee/legal heir, no minimum tenure required
- On retrenchment/layoff — if tenure exceeds 5 years
- Employer must pay within 30 days of the due date. Delay attracts simple interest at 10% per annum.
Tax Treatment of Gratuity
| Employee Type | Tax-Free Limit | Excess Taxed As |
|---|---|---|
| Government employees | Fully exempt | N/A |
| Private sector (covered under Gratuity Act) | Least of: ₹20L, actual gratuity, or 15/26 × basic × years | Income from salary |
| Private sector (not covered under Act) | Least of: ₹10L, actual, or ½ month's salary × years | Income from salary |
Practically, for most private sector employees, gratuity under ₹20 lakh is completely tax-free.
FAQ
Does gratuity apply if I am on a fixed-term contract?
Yes — the Supreme Court ruled in 2016 that fixed-term contract employees are also eligible for gratuity if they complete 5+ years of continuous service with the same employer.
Does basic salary include allowances for gratuity calculation?
No. Gratuity is calculated on basic salary + Dearness Allowance only. HRA, special allowance, and other components are excluded. This is why it's important to know your basic salary — not just your CTC.
What happens if my employer refuses to pay gratuity?
File a complaint with the Controlling Authority (typically the Labour Commissioner of your state) under Section 7 of the Payment of Gratuity Act. They can compel payment plus interest. The process is generally employee-friendly.
