The gratuity formula
Under the Payment of Gratuity Act, 1972 (which covers most employers with 10 or more employees), gratuity for employees not covered by a separate piece-rate scheme is calculated as:
Gratuity = (Last drawn salary × 15 × Years of service) ÷ 26
"Last drawn salary" here means Basic pay + Dearness Allowance only — not your full CTC, and not any bonus, commission or other allowance. The 15/26 fraction represents 15 days of wages for every year worked, based on a 26-working-day month (the Act's own assumption, excluding Sundays).
Service is counted in completed years; a part-year of more than 6 months is rounded up to the next full year, and 6 months or less is dropped. The total payable is also capped at ₹20 lakh under the current statutory limit — an employer can choose to pay more, but only the amount up to the cap gets the Act's tax exemption.
Who is eligible
- Generally, 5 years of continuous service with the same employer is required — except in case of death or disability, where the 5-year requirement is waived.
- Applies to employees of an organisation with 10 or more employees on any day in the preceding 12 months.
- Payable on resignation, retirement, retrenchment, death, or disability — not only on retirement.
Frequently asked questions
Is gratuity taxable?
For employees covered by the Payment of Gratuity Act, the amount received is exempt from income tax up to ₹20 lakh (the current statutory cap) — anything an employer pays beyond that limit is taxable.
What counts as "last drawn salary" for this calculation?
Only Basic pay plus Dearness Allowance (DA) — not your full CTC, and not HRA, bonuses, commissions or other allowances, even if your employer includes those in your monthly payslip.
What if I worked 7 years and 8 months?
Rounded up to 8 years, since the extra period exceeds 6 months. Had it been 7 years and 5 months, it would round down to 7 — only the completed years count, plus one more if the remainder exceeds half a year.
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