How Gratuity Is Calculated in India: Formula, Exemption Limits & Rules for Private Employees
Tax Regime Applicability: Both Regimes
Learn exactly how gratuity is calculated in India under the Payment of Gratuity Act, 1972 — the 15/26 formula for covered establishments, 15/30 for non-covered establishments, eligibility rules for private and fixed-term employees, and the Section 10(10) tax exemption limit, with a full worked example.
Analyst Verdict: Gratuity for employees covered under the Payment of Gratuity Act, 1972 uses the formula: (Last Drawn Basic + DA) × 15 ÷ 26 × Completed Years of Service.
Key Takeaways
- Gratuity for employees covered under the Payment of Gratuity Act, 1972 uses the formula: (Last Drawn Basic + DA) × 15 ÷ 26 × Completed Years of Service.
- Service of more than 6 months in the final year rounds up to the next full year for covered establishments — a service of 10 years 8 months counts as 11 years.
- Non-covered establishments use a 15/30 divisor instead, and do not round up part-years — only full completed years count.
- Regular employees need a minimum of 5 years of continuous service to be eligible; fixed-term contract employees need only 1 year under the Code on Social Security, 2020.
- Private-sector gratuity is tax-free up to a cumulative ₹20 Lakh limit under Section 10(10); government employee gratuity is 100% tax-free with no cap.
The Gratuity Formula, Explained
Gratuity is a lump-sum benefit paid by an employer to reward long-term service. For an employee covered under the Payment of Gratuity Act, 1972, it's calculated using a 15/26 formula — 15 days of wages for every completed year of service, based on a standard 26-working-day month:
- "Wages" in this formula means last drawn Basic Salary + Dearness Allowance only — never your full CTC, and never including bonus, variable pay or allowances.
- The 6-month rounding rule only applies to covered establishments. A tenure of exactly 10 years 6 months does not round up; it needs to exceed 6 months.
| Step | Calculation | Result (Example) |
|---|---|---|
| 1. Round service tenure | 10 years 8 months → 8 months > 6, rounds up | 11 years |
| 2. Daily wage rate | ₹50,000 Basic + DA × 15 ÷ 26 | ≈ ₹28,846 |
| 3. Gratuity payout | ₹28,846 × 11 years | ≈ ₹3,17,308 |
Covered vs Non-Covered Establishments: 15/26 vs 15/30
Whether your employer is "covered" under the Payment of Gratuity Act changes both the divisor and the rounding rule:
| Covered Establishment | Non-Covered Establishment | |
|---|---|---|
| Formula | (Basic + DA) × 15 ÷ 26 × Years | (Basic + DA) × 15 ÷ 30 × Years |
| Part-year rounding | > 6 months rounds up to next year | Only full completed years count |
| Who it applies to | Most companies with 10+ employees | Establishments outside the Act's coverage |
Eligibility Rules: Who Can Claim Gratuity?
Under the Payment of Gratuity Act, 1972 (and the Code on Social Security, 2020), gratuity eligibility depends on your employment category and years of continuous service:
- Regular Employees: Minimum 5 years of continuous service with the same employer.
- Fixed-Term Contract Employees: Minimum 1 year of continuous service under the Code on Social Security, 2020.
- The 5-year requirement is waived in case of an employee's death or permanent disablement due to accident or disease — gratuity becomes payable regardless of tenure.
Gratuity Tax Exemption Under Section 10(10)
Not all gratuity received is automatically tax-free — the exemption depends on your employment sector:
- Government Employees: Gratuity received is 100% tax-exempt under Section 10(10)(i), with no upper limit.
- Private-Sector Employees Covered by the Act: Exempt up to the lower of the actual gratuity received, ₹20 Lakhs (the current statutory cap), or the amount calculated under the 15/26 formula.
- Any gratuity amount above the ₹20 Lakh exemption limit is added to your taxable salary income and taxed at your applicable slab rate.
Frequently Asked Questions
How is gratuity calculated for private employees?
For private-sector employees covered under the Payment of Gratuity Act, gratuity is calculated as (last drawn Basic Salary + Dearness Allowance) × 15 ÷ 26 × completed years of service, with service exceeding 6 months in the final year rounding up to the next full year.
What is the gratuity calculation formula for non-covered establishments?
Non-covered establishments use (last drawn Basic + DA) × 15 ÷ 30 × completed years of service — a 30-day divisor instead of 26, and only full completed years count, with no rounding up for partial years.
Is PF the same as gratuity?
No. Provident Fund (PF/EPF) is a separate retirement savings scheme funded by monthly employee and employer contributions throughout your employment. Gratuity is a one-time lump-sum benefit paid only at the end of service, calculated from your final salary and total tenure — the two have entirely different formulas and eligibility rules.
What is the maximum tax-free gratuity limit?
For private-sector employees, gratuity is tax-exempt under Section 10(10) up to a cumulative limit of ₹20 Lakhs across your career. Government employees receive gratuity that is 100% tax-free with no cap.