Gratuity Calculator India

What is Gratuity? Complete Guide for Indian Employees

Gratuity is a lump sum payment made by an employer to an employee as a token of appreciation for services rendered over the years. Governed by the Payment of Gratuity Act, 1972, it's a statutory benefit designed to provide financial security to employees during retirement, resignation, or termination after completing a minimum qualifying period.

This benefit is mandatory for all organizations employing 10 or more workers, including factories, mines, oilfields, plantations, ports, railway companies, shops, and establishments. Gratuity is entirely employer-funded—employees don't contribute a single rupee, making it one of the most valuable retirement benefits in India.

Key Features of Gratuity in India

• Statutory Right: Not discretionary—legally mandated for eligible organizations
• Zero Employee Contribution: Unlike EPF, completely employer-funded
• Tax Benefits: Up to ₹20 lakhs is tax-exempt under Section 10(10)
• 5-Year Eligibility: Generally requires 5 years of continuous service
• Protected Payment: Must be paid within 30 days of becoming due
• Nominee Benefits: Transferable to family in case of employee death

Who is Eligible for Gratuity?

To claim gratuity, you must meet these conditions:

• Continuous Service: Minimum 5 years of uninterrupted service with the same employer
• Organization Size: Employer must have 10+ employees (applies once achieved, even if count drops later)
• Separation Event: Retirement, resignation, superannuation, death, or disablement

Exceptions to 5-Year Rule: In cases of death or disablement due to accident/disease, gratuity is payable immediately regardless of service tenure. Nominees receive the full entitled amount.

Gratuity Calculation Formula Explained

The standard formula for calculating gratuity is:

Gratuity = (Last Drawn Salary × Years of Service × 15) / 26

Let's break down each component:

1. Last Drawn Salary

Includes: Basic Pay + Dearness Allowance (DA) only

Excludes: HRA, Conveyance, Medical, Special Allowances, Bonuses, Overtime, Incentives

Example: If your CTC is ₹15 lakhs with Basic = ₹6 lakhs and DA = ₹1.5 lakhs annually, only ₹7.5 lakhs (₹62,500/month) counts for gratuity calculation.

2. Years of Service

Service calculation follows specific rounding rules:

• 6+ Months: Round up to next year (e.g., 15 years 7 months = 16 years)
• Less than 6 Months: Round down (e.g., 15 years 4 months = 15 years)
• Authorized Leaves: Maternity, sick, annual leave don't break continuity

3. The Factor of 15

Represents 15 days of wages for every completed year of service—a statutory provision ensuring approximately half a month's salary per year worked.

4. Working Days Divisor (26 or 30)

• 26 Days: For organizations covered under the Act (excludes 4 Sundays)
• 30 Days: For organizations NOT covered (uses calendar month days)

Maximum Gratuity Limit in 2026

As per the Payment of Gratuity (Amendment) Act, 2018, the maximum gratuity payable is capped at ₹20 lakhs (increased from ₹10 lakhs). Any calculated amount exceeding this limit is reduced to ₹20 lakhs.

Tax Treatment of Gratuity

Gratuity taxation depends on your employment type:

For Private Sector Employees (Covered Under Act)

The minimum of the following three amounts is tax-exempt:

1. ₹20 lakhs (statutory ceiling)
2. Actual gratuity received
3. Calculated gratuity: (Last salary × Years × 15) / 26

Any amount exceeding the exempt limit is added to your income and taxed according to your income tax slab.

For Government Employees

• Complete Exemption: Entire gratuity amount is tax-free
• No Ceiling: ₹20 lakh cap doesn't apply
• Includes: Central/State government, local authorities, statutory corporations, defense services

Practical Gratuity Calculation Example

When is Gratuity Paid?

The Payment of Gratuity Act mandates strict timelines:

• Application: Employee must apply in Form I within 30 days of gratuity becoming payable
• Payment Deadline: Employer must pay within 30 days from the date it becomes due
• Interest on Delay: 10% per annum simple interest if payment is delayed beyond 30 days
• Mode: Usually direct bank transfer with final settlement

Can Gratuity Be Forfeited?

Gratuity can be wholly or partially forfeited only under specific circumstances:

• Willful Damage: If services terminated for causing damage to employer's property through negligence
• Violence: Termination due to riotous or violent conduct on premises
• Moral Turpitude: Conviction for an offense involving moral turpitude (fraud, embezzlement, etc.)

Important: Gratuity CANNOT be forfeited for poor performance, personality conflicts, joining competitors, or minor policy violations.

Gratuity vs EPF vs Pension

Common Gratuity Mistakes to Avoid

1. Including Wrong Salary Components: Only Basic + DA counts, not gross salary or CTC
2. Incorrect Service Rounding: Remember 6+ months rounds up, less than 6 rounds down
3. Ignoring Tax Implications: Amounts above ₹20 lakhs are taxable as per your slab
4. Not Updating Nominee: Keep nomination current after major life events
5. Missing Application Deadline: Submit Form I during notice period to avoid delays
6. Expecting Gratuity Before 5 Years: Generally not payable unless death or disablement

How to Claim Your Gratuity

Follow these steps for smooth gratuity settlement:

1. Submit Resignation/Retirement Notice: As per your company's notice period
2. Fill Form I: Apply for gratuity within 30 days of last working day
3. Provide Documents: ID proof, bank details, relieving letter, service records
4. HR Verification: Company verifies service tenure and salary details
5. Receive Payment: Amount credited within 30 days, usually with final settlement
6. Check Form 16: Gratuity should be reflected in your Form 16 for tax filing