What is gratuity?
Gratuity is the lump sum your employer must pay you for long service — a statutory thank-you under the Payment of Gratuity Act, 1972, due when you resign, retire, or are laid off after 5 years of continuous service (the 5-year condition is waived if the employee dies or is disabled). Any establishment with 10 or more employees is covered, which in practice means nearly every salaried job in India — and once covered, an employer stays covered even if headcount later falls.
The 15/26 formula
The Act awards 15 days’ wages for every completed year of service, and — the detail everyone forgets — a month is counted as 26 working days, not 30. “Wages” means your last drawn Basic + dearness allowance, not the full CTC:
Gratuity = (Basic + DA) × 15⁄26 × years of service
Service is rounded generously: anything beyond 6 months counts as a full year. Leave after 7 years and 7 months and you are paid for 8 years; at exactly 7 years 6 months, for 7.
Worked example: last drawn Basic + DA of ₹60,000 and 20 years 7 months of service → 21 years counted → 60,000 × 15⁄26 × 21 ≈ ₹7,26,923. The calculator above shows the same per-year wage (₹34,615 here) so you can sanity-check any offer letter or full-and-final statement.
Not covered by the Act?
Smaller establishments (under 10 employees) sometimes pay gratuity voluntarily. Convention — and the income-tax exemption rules — then use half a month’s average salary per completed year on a 30-day month (15⁄30), with no rounding up of part-years, and “salary” averaged over the last 10 months. The toggle above switches to this stricter arithmetic.
The ₹20 lakh ceiling
The Act caps payable gratuity at ₹20 lakh (raised from ₹10 lakh in 2018). The same ₹20 lakh is your lifetime tax-free ceiling under Section 10(10) — it stretches across every employer you ever claim gratuity from, and it survives in the new tax regime too. For covered private-sector employees the exempt amount is the least of: what you actually receive, the 15/26 formula amount, and ₹20 lakh — anything beyond is taxed at your slab (see the income-tax calculator). Government employees’ gratuity is fully exempt, and central-government staff have a separate, higher pension-rules ceiling — a different track from this Act.
That 4.81% line in your CTC
Ever wondered why offer letters accrue gratuity at 4.81% of Basic? It is this exact formula spread monthly: 15⁄26 of a month per year, divided by 12 months = 4.807%. Your employer is provisioning the same rupees this page computes — the take-home salary calculator shows where that line sits in your CTC. Remember: it is money you only collect by staying 5 years.
The fine print worth knowing
Timelines: the employer must pay within 30 days of it falling due, after which it accrues interest. Forfeiture is the rare exception, allowed only for termination over riotous conduct, moral turpitude, or wilful damage — and only to the extent of the damage. Nominate someone via Form F when you join; it decides who receives the money if the worst happens. The new labour codes (in force since November 2025) keep the formula and the ₹20 lakh cap intact, and extend gratuity to fixed-term employees after just 1 year, pro-rata, as state rules roll out. Some High Courts have also treated 4 years + 240 days as qualifying service — if you are just short of 5 years, it is worth asking.