Payroll & statutory · Updated September 2026
Gratuity is a lump sum an employer pays you for sticking around. Once you have put in five years of continuous service, the Payment of Gratuity Act, 1972 turns it from a goodwill gesture into a legal entitlement, calculated by a fixed formula rather than left to the employer’s discretion. Most people only discover the exact number when they are already halfway out the door, which is a poor time to find out it was mis-set years earlier.
The Act applies to every factory, mine, plantation, port, railway company, and to shops and establishments that have employed 10 or more people on any day in the preceding 12 months. Once the Act applies to an establishment, it keeps applying even if headcount later drops below 10. Almost every private-sector employee working in an office of any size in India is covered.
You become eligible after five years of continuous service with the same employer. The one exception: if service ends because of death or disablement, the five-year condition is waived and gratuity is paid for whatever service was completed. A widely relied-on Madras High Court ruling has also treated 4 years and 240 days in the fifth year as meeting the five-year test, but this is not settled nationally, so do not promise it to a departing employee without checking your own state’s position.
For a covered establishment, the formula is:
Gratuity = (15 × last drawn Basic + DA × completed years of service) ÷ 26
The 26 is the number of working days the Act assumes in a month. Only basic salary and dearness allowance go into the calculation, not HRA, special allowance, bonus or your full CTC. Service beyond six months in the final year rounds up to a whole year; six months or less is dropped.
Say your last drawn Basic + DA is Rs 60,000 and you served 12 years and 7 months. The seven months round up, so you count 13 years:
(15 × 60,000 × 13) ÷ 26 = Rs 4,50,000
Establishments not covered by the Act sometimes use a slightly less generous variant, dividing by 30 and using 15 days’ wages, on a calendar-month basis. The Gratuity Calculator handles both and applies the rounding rule for you.
Gratuity becomes payable when employment ends, by resignation, retirement, termination, death or disablement. The employer must pay within 30 days of it becoming due; delay beyond that attracts simple interest. In practice it is settled as part of your full and final settlement, alongside pending salary and leave encashment.
For non-government employees covered by the Act, gratuity is tax-exempt up to the least of the amount actually received, the amount the formula produces, and Rs 20 lakh. The Rs 20 lakh ceiling is a lifetime limit across all employers, so a large gratuity from an earlier job reduces the room available on a later one. Anything above the exempt figure is taxed as salary income. Government employees get full exemption with no cap.
The most common problem is a salary structure with an artificially low basic. Because gratuity, PF and bonus all key off Basic + DA, a structure that pushes most of the pay into special allowance to reduce employer cost also shrinks the eventual gratuity, often without the employee realising until exit. The Code on Wages, once in force, will force basic to at least 50% of total pay and largely close this gap; until then it is worth checking your own breakup against the Salary Breakup Calculator.
The second is nomination. Gratuity nomination is done on Form F, and if it is missing or stale when an employee dies, the payout can get stuck between claimants for months. If you run payroll, a nomination check belongs in your joining and annual-review checklists, and a capable payroll system will flag the gaps for you.
Many employers show an annual gratuity provision, roughly 4.81% of Basic + DA, as a line in CTC. It is a genuine cost to the employer, but it is only paid to you if you complete five years, so treating it as spendable income before then is a mistake.
Yes. Five years of continuous service is a statutory condition and it is not waived for resignation, only for death or disablement. Some employers voluntarily pay a pro-rated amount, but they are not obliged to.
Only in narrow cases. Under Section 4(6), gratuity can be wholly or partly forfeited where service was terminated for wilful damage or loss to the employer’s property, or for riotous conduct or an offence involving moral turpitude committed in the course of employment, and only after due process. Ordinary performance-related exits do not forfeit gratuity.
Once you have your estimate, see how the payout sits inside your exit dues with the Full and Final Settlement Calculator, or read how leave dues are handled in our guide to leave encashment.