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How Gratuity Is Calculated in India

Gratuity is fifteen days of basic pay for every completed year, on a twenty-six day month. The details around that formula decide how much you actually get.

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The short version

  • The formula is (15 × last drawn basic + DA × completed years) ÷ 26.
  • Six months or more in the final year rounds up to a full year.
  • Five years of continuous service is required, except on death or disablement.
  • Tax exemption is capped at ₹20 lakh across your entire working life.

The formula, and why 26

Under the Payment of Gratuity Act, 1972, an employer covered by the Act pays fifteen days of wages for every completed year of service. The wages used are the last drawn basic salary plus dearness allowance — not gross, and certainly not CTC.

The divisor is 26, not 30, because the Act treats a month as twenty-six working days, excluding weekly rest days. That choice quietly makes gratuity about 15% larger than a thirty-day month would produce, and it is the reason employers book the provision at 4.81% of basic: 15 ÷ 26 ÷ 12 = 0.0481.

Rounding is generous, but only one way

Six months or more of service in your final year counts as a complete year. Less than six months does not count at all.

That produces a sharp cliff. Someone leaving after 10 years and 7 months is paid for 11 years; someone leaving after 10 years and 5 months is paid for 10. On a ₹50,000 basic, those two months of difference are worth roughly ₹29,000.

If you are close to the line and have any flexibility on your last working day, it is worth doing the arithmetic before resigning.

The five-year rule and the 240-day argument

Gratuity normally becomes payable only after five years of continuous service with the same employer. The condition is waived entirely where service ends because of death or disablement.

There is a longstanding argument that four years and 240 days amounts to five years of continuous service, based on how the Act defines continuous service and on rulings from several High Courts. It has been accepted in some cases and by some employers, but it is not settled uniformly across the country.

If you are close to five years, the honest position is that it depends on your employer’s policy and, if contested, on which High Court’s reasoning applies. Ask your employer to confirm their practice in writing before you resign, rather than relying on a rule you read online.

Tax

  • For non-government employees, gratuity is exempt under section 10(10) up to ₹20 lakh. Anything above that is taxable as salary.
  • The ₹20 lakh ceiling applies across your entire working life, not per employer. Gratuity received from an earlier employer counts against it.
  • Government employees receive full exemption.
  • Gratuity paid to a nominee on the death of an employee has its own treatment — check the position for your specific case.

Frequently asked questions

Is gratuity calculated on CTC or basic salary?
On last drawn basic salary plus dearness allowance. Since basic is typically only 40–50% of CTC, gratuity works out to far less than people expect when they assume it is based on total salary.
Do 4 years and 240 days count as five years?
It is genuinely contested. Some High Courts have held that 240 days of work in the fifth year completes a year of continuous service, and some employers follow that. It is not settled uniformly. If you are close to the threshold, get your employer’s position in writing before resigning.
What if my employer refuses to pay gratuity?
Submit a written claim in Form I. If it is not paid within thirty days of becoming due, apply to the Controlling Authority appointed under the Act, which can order payment with interest. Keep your appointment letter, salary slips and relieving letter — they establish service and last drawn wages.

Sources

Every figure on this page is traceable to the official source below. If a source has changed since the date shown, please tell us and we will correct it.