Gratuity Calculator

Gratuity — Your Legal Entitlement After 5 Years of Service

Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for long service. It's governed by the Payment of Gratuity Act, 1972, which applies to all organizations with 10 or more employees. Once an organization crosses 10 employees, it remains covered under the Act even if headcount later falls below 10.

The fundamental eligibility condition is 5 years of continuous service with the same employer. The 5-year clock starts from the date of joining and runs to the date of separation — whether by resignation, retirement, or termination. Death and disability are exceptions: gratuity is paid even before 5 years.

The gratuity is paid at the time of leaving the organization — not annually. It's a farewell benefit, not a running entitlement.

The Gratuity Formula — 15/26

The formula for calculating gratuity under the Act is:

Where Last Drawn Salary = Basic Pay + Dearness Allowance (DA). HRA, allowances, bonuses are excluded. 15 = 15 working days. 26 = average working days per month.

Example: Basic + DA = ₹60,000/month. Service = 8 years 7 months (rounded up to 9 years as per Act).

• Gratuity = (60,000 × 15 × 9) / 26
• = ₹8,10,00,000 / 26
• = ₹3,11,538

Rounding of Service Period and the ₹20 Lakh Cap

If the last year of service exceeds 6 months, it's rounded up to a full year. Less than 6 months is ignored. So 8 years 7 months counts as 9 years. 8 years 4 months counts as 8 years. This rounding can make a meaningful difference — try to not resign in the first half of the calendar year if you're within a year of a significant tenure milestone.

The maximum gratuity that is tax-exempt is ₹20 lakh (increased from ₹10 lakh to ₹20 lakh in 2018). Gratuity above ₹20 lakh is taxable as salary income. For most employees in India, the gratuity amount is well below ₹20 lakh, so the entire amount is effectively tax-free.

Gratuity for Non-Permanent and Contract Workers

Contract workers and daily-wage employees are entitled to gratuity under the Act if they complete 5 years of continuous service. The challenge is proving continuous service when employment is through a contractor. The courts have generally held that if the nature of work has been continuous and the employee has worked for the same principal employer, gratuity eligibility applies.

For fixed-term contract employees (a category formalized under the Industrial Relations Code 2020), gratuity is payable on a pro-rata basis — you don't need 5 years. If a fixed-term contract employee completes their contract term, they receive gratuity proportional to their service.

Employers who fail to pay gratuity within 30 days of it becoming due are liable to pay simple interest at the prescribed rate. Complaints can be filed with the Controlling Authority (typically the labor officer) under the Gratuity Act.