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Gratuity Calculation in India Explained (with Examples)
How gratuity is calculated in India, the 15/26 formula, the five-year eligibility rule, worked examples, and how much of it is tax-free.
By Analyze Daily Team · Published 20 June 2026 · Updated 15 July 2026
Key takeaways
- Gratuity = (15 ÷ 26) × last drawn basic + DA × completed years, for covered employers.
- You need five years of continuous service to be eligible.
- A final part-year of more than six months counts as a full year.
- The gratuity exemption depends on employee category and current tax rules; ₹20 lakh is the common ceiling for covered non-government employees.
What gratuity is
Gratuity is a lump-sum reward your employer pays for long service, governed by the Payment of Gratuity Act for covered organisations. It is paid when you resign, retire, or in certain other cases after qualifying service.
Many employees forget it exists until they leave, then underestimate how much they have earned.
The formula
For employers covered by the Act, gratuity equals (15 ÷ 26) × your last drawn monthly basic plus dearness allowance × the number of completed years of service.
The 15/26 represents 15 days of wages for every year, using 26 as the assumed number of working days in a month. Note that only basic plus DA is used — not your gross salary or CTC.
Worked examples
A couple of examples make the formula concrete. Assume the figure below is your last drawn monthly basic plus DA.
- ₹50,000 basic, 10 completed years: (15 ÷ 26) × 50,000 × 10 ≈ ₹2,88,462.
- ₹40,000 basic, 7 years 8 months (rounds up to 8 years): (15 ÷ 26) × 40,000 × 8 ≈ ₹1,84,615.
- ₹60,000 basic, 8 completed years: (15 ÷ 26) × 60,000 × 8 ≈ ₹2,76,923.
Eligibility and rounding rules
Two rules trip people up. First, you generally need five years of continuous service to qualify, except in cases of death or disablement. Below five years, no gratuity is payable.
Second, a final part-year counts as a full year only if it exceeds six months. So 7 years 8 months is treated as 8, but 7 years 4 months stays at 7 — which is why exit timing can matter.
Tax on gratuity
Gratuity can receive an income-tax exemption, but the calculation and ceiling depend on the employee category.
For covered non-government employees, ₹20 lakh is the commonly applicable exemption ceiling, subject to the statutory formula and aggregate limits. Government and other employee categories can follow different rules, so verify the category in the current Income Tax filing guidance.
Sources and review
How this guide was prepared
Material rules and regulated assumptions are checked against primary or first-party references. The page was last reviewed on 15 July 2026. If a rule or figure has changed, please report it through our corrections process.
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