How is gratuity calculated, and when are you eligible?

Gratuity is 15 days of wages for every completed year of service, and the 15 days figure comes from a specific formula: your last drawn monthly wages, divided by 26, multiplied by 15. You need five years of continuous service to qualify, except in cases of death or disablement, where that requirement does not apply at all. Our gratuity calculator works out the exact payable amount, including whether a part year rounds up.

The formula, and the mistake that undercounts it

Section 4 of the Payment of Gratuity Act sets the daily rate for a monthly rated employee at monthly wages divided by 26, not divided by 30. The Act treats a month as 26 working days for this specific purpose, and using 30 instead is the single most common error in gratuity arithmetic. It always understates what an employee is owed, by roughly 13 percent.

Take Sunil, whose last drawn basic plus DA is 48,000 rupees a month, with 12 years and 8 months of service. His daily rate is 48,000 divided by 26, which is 1,846.15 rupees. Fifteen days of that is 27,692.31 rupees. Because his part year of 8 months exceeds the 6 month threshold, it rounds up to a full year, making his counted service 13 years. His gratuity payable is 27,692.31 multiplied by 13, which comes to exactly 3,60,000 rupees.

Five years, and what the part year rule actually does

Gratuity is payable only after five years of continuous service, and there is no proportionate gratuity below that threshold, however close an employee was. Once that five year mark is cleared, a part year in excess of six months counts as a full additional year. The wording matters: exactly six months does not round up, six months and one day does.

Death or disablement removes the five year qualifying period entirely. Gratuity becomes payable however short the actual service was, because the Act treats this situation differently from a voluntary exit.

The ceiling, and how it interacts with tax

Gratuity payable under the Act is capped at 20 lakh rupees. That figure does not appear in the original Act text, which still says 10 lakh, it was raised by a government notification in March 2018. The same 20 lakh figure is also the tax exemption limit under the Income Tax Act for private sector employees covered by the Payment of Gratuity Act, and it applies as a lifetime limit across every employer, not a fresh allowance each time you change jobs.

An employer can choose to pay more than the statutory ceiling voluntarily. Anything paid above 20 lakh rupees is taxable as ordinary salary income, and it enters the same computation as the rest of your earnings for the year.

What people get wrong about this

Using gross salary or cost to company instead of basic plus DA. This is the opposite error to the divisor mistake, and it inflates the figure well above what will actually be paid. Basic is often only 40 to 50 percent of a full CTC package, so the gap can be large.

Assuming four years and eleven months is close enough. It is not. The qualifying test is five completed years, and there is no partial entitlement below that line except in death or disablement.

Believing the 20 lakh exemption resets at every job. It does not. Section 10(10)(ii) treats it as a lifetime limit across all employers, so gratuity received earlier in your career counts against the same ceiling.

Assuming this calculation applies to every employee. These figures cover employees who are covered by the Payment of Gratuity Act specifically. Employees outside the Act’s coverage are computed on a different basis, and that basis is not published here because it has not been independently verified against an official source.

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