Gratuity is one of the few employee benefits in India that is 100% employer-funded — you don't contribute a single rupee from your salary. Under the Payment of Gratuity Act, 1972, every employee who completes 5 years of continuous service is entitled to a lump sum payment calculated using the 15/26 formula. For an employee with Basic+DA of ₹50,000/month and 10 years of service, that's ₹2.88 lakh — tax-free up to ₹20 lakh (lifetime). With the new Labour Codes effective from November 2025, fixed-term employees now qualify after just 1 year, and the wage base for calculation is set to increase significantly.
Understanding gratuity matters for retirement planning and salary negotiations. Many employees underestimate their gratuity entitlement — or worse, don't claim it at all when switching jobs. This guide covers the exact formula, eligibility rules, tax exemption, rounding rules, and what the new Labour Codes change.
Gratuity = (15 × Last Drawn Basic + DA × Years of Service) ÷ 26. 15 = days of wages per year | 26 = working days in a month (excl. Sundays). Roughly equals half a month's salary per year worked. Tax-free up to ₹20 lakh (lifetime). Use our Gratuity Calculator for instant computation.
Gratuity Calculation Table: Various Salary Levels (Verified)
| Basic + DA (Monthly) | 5 Years | 10 Years | 15 Years | 20 Years | 25 Years | 30 Years |
|---|---|---|---|---|---|---|
| ₹30,000 | ₹86,538 | ₹1.73L | ₹2.60L | ₹3.46L | ₹4.33L | ₹5.19L |
| ₹50,000 | ₹1.44L | ₹2.88L | ₹4.33L | ₹5.77L | ₹7.21L | ₹8.65L |
| ₹75,000 | ₹2.16L | ₹4.33L | ₹6.49L | ₹8.65L | ₹10.82L | ₹12.98L |
| ₹1,00,000 | ₹2.88L | ₹5.77L | ₹8.65L | ₹11.54L | ₹14.42L | ₹17.31L |
| ₹1,50,000 | ₹4.33L | ₹8.65L | ₹12.98L | ₹17.31L | ₹21.63L* | ₹25.96L* |
*Amounts exceeding ₹20 lakh: the excess is taxable as salary income at your slab rate. At Basic+DA of ₹1.5 lakh/month, gratuity crosses the ₹20 lakh tax-free cap at around 23 years of service. For most Indian employees with Basic+DA of ₹30K-75K, gratuity stays well within the tax-free limit even at 30 years. Note: Only Basic + DA counts — not HRA, special allowance, or other components. The 15/26 ratio works out to approximately 0.577, meaning you get roughly half a month's salary for each year worked.
Eligibility Rules & Rounding
| Rule | Detail | Example |
|---|---|---|
| 5-year minimum | Continuous service with same employer | 4yr 11mo = not eligible (unless rounding applies) |
| Rounding (>6 months) | Months above 6 in final year round up to next full year | 7yr 7mo → 8yr (₹2.31L vs ₹2.02L at ₹50K — extra ₹28,846) |
| Death/disability | 5-year minimum waived; paid to nominee/legal heir | Even 2 years of service qualifies |
| Fixed-term (new) | Eligible after 1 year (Social Security Code 2020, effective Nov 2025) | 18-month contract employee gets proportionate gratuity |
| 10+ employee rule | Act applies to establishments with 10+ employees on any day in preceding 12 months | IT company with 10 employees = covered |
| Forfeiture | Only for violent/criminal misconduct | Resignation or poor performance = cannot forfeit |
| Payment deadline | Within 30 days of last working day | Delay = employer pays interest |
Tax Treatment of Gratuity (Section 10(10))
| Employee Type | Tax Treatment | Exemption Limit |
|---|---|---|
| Government (Central/State/Local) | 100% tax-free | No upper limit |
| Private sector (covered under Act) | Exempt up to lowest of 3 values | Lowest of: (a) Actual gratuity, (b) ₹20 lakh, (c) 15/26 formula amount |
| Private sector (not covered) | Exempt up to lowest of 3 values | Lowest of: (a) Actual gratuity, (b) ₹20 lakh, (c) Half-month avg salary × years |
The ₹20 lakh limit is cumulative across your entire working life — not per employer. If you claimed ₹8 lakh tax-free from a previous employer, only ₹12 lakh remains for future exemptions. Any amount above the exempt portion is added to your salary income and taxed at your applicable slab rate under the old or new tax regime. For government employees, gratuity is fully exempt regardless of amount — a significant advantage. For tax optimization, also see Section 80C deductions, HRA exemption, and capital gains tax.
Calculate Your Gratuity Instantly
Enter your Basic+DA and years of service to see exact gratuity, tax-free amount, and taxable portion.
Open Gratuity Calculator →15/26 vs 15/30: Which Formula Applies to You?
| Formula | Applies To | ₹50K Basic × 10yr | ₹50K Basic × 20yr | Difference |
|---|---|---|---|---|
| 15/26 (Act) | Establishments with 10+ employees | ₹2,88,462 | ₹5,76,923 | 15/26 gives ₹38,462 more at 10yr |
| 15/30 (Non-Act) | Smaller firms, or tax exemption calc for non-Act employees | ₹2,50,000 | ₹5,00,000 |
The 15/26 formula gives a higher payout because it uses 26 working days (excluding Sundays) rather than 30 calendar days. Most formal sector employees — in IT companies, banks, factories, shops with 10+ staff — fall under the 15/26 formula. The difference becomes significant at higher salaries and longer tenures. Combine gratuity with your EPF, PPF, and NPS to build your complete retirement corpus. Also factor in real rate of return, the cost of delay, step-up SIP, and FD real returns after inflation. Use our EPF Calculator, PPF Calculator, NPS Calculator, SIP Calculator, Inflation Calculator, Income Tax Calculator, and Purchasing Power Calculator. For more context, read about beating inflation, pension vs lumpsum, and EPF interest rate history.