Gratuity calculation: formula, eligibility and tax, with a calculator

For an employer covered by the law (broadly, one with ten or more employees):

Gratuity = 15 ÷ 26 × last drawn monthly wages × years of service

• 15/26 is fifteen days’ wages, taking a month as 26 working days.
• Years of service: every completed year counts, and a final part-year of more than six months counts as a full year. Seven years and seven months counts as eight; seven years and five months counts as seven.
• Wages: basic pay plus dearness allowance and retaining allowance. HRA, conveyance, overtime, bonus and most other allowances are excluded, but see the 50 percent rule below.

Example. Basic plus DA of ₹50,000 and 7 years 7 months of service: 15/26 × 50,000 × 8 = ₹2,30,769.

In seasonal establishments, gratuity is seven days’ wages for each season worked instead of fifteen.

Continuous service includes periods of authorised leave, sickness, accident, lawful strike and lay-off. Some High Courts have also held that 240 days of work in the fifth year can complete the fifth year for the eligibility test.

The labour codes stop employers from shrinking gratuity by keeping basic pay artificially low. If the allowances excluded from “wages” add up to more than 50 percent of total remuneration, the excess is treated as wages for gratuity, PF and other code benefits.

Example. Total pay ₹1,00,000 a month, of which basic plus DA is ₹35,000 and allowances are ₹65,000. Allowances exceed half of total pay by ₹15,000, so wages for gratuity become ₹50,000, not ₹35,000. Over ten years that lifts gratuity from about ₹2.02 lakh to ₹2.88 lakh.

Many employers restructured salaries after November 2025 for this reason. If your basic is well under half your gross, check your payslip against the rule.

• Ceiling: gratuity under the law is capped at an amount notified by the Central Government, currently ₹20 lakh. Employers can pay more under their own policy, but the excess is taxable.
• Timing: the employer should pay within 30 days of it becoming payable. Late payment carries simple interest, and the employee can approach the controlling authority under the Code.
• Nomination: employees should file a nomination early; it decides who receives gratuity on death.

The ₹20 lakh exemption is a lifetime limit across all employers, reduced by gratuity exempted earlier. The exemption (formerly section 10(10)) applies in both the old and new tax regimes. Any taxable excess is salary in the year received; relief for arrears-style lump sums can sometimes be claimed through the prescribed form. Gratuity received by a nominee after the employee’s death is not salary and is generally not taxable in the nominee’s hands.

Gratuity and its exempt part appear in your Form 16 from the last employer.