Gratuity is a lump sum your employer pays you as a "thank you" for long service — and for many people it's a pleasant surprise when they leave a job. But the rules around who qualifies, how it's calculated, and how much is tax-free confuse a lot of people. Here's the full picture.

What is gratuity?

Gratuity is a statutory benefit under the Payment of Gratuity Act, 1972, paid by employers with 10 or more employees. It's paid when you leave — on resignation, retirement, or (in some cases) earlier events like disability. Think of it as a reward for sticking around.

Who is eligible?

The key rule: you generally need 5 continuous years of service with the same employer to qualify. Leave before completing 5 years and, in most cases, you get nothing (the main exceptions are death or disablement, where the 5-year rule is waived).

The 5-year threshold is why gratuity quietly rewards staying — quit at 4 years 11 months and you usually forfeit it entirely.

The formula

For employees covered by the Act:

Gratuity = Last drawn salary × (15 / 26) × Years of service

  • Last drawn salary = your final monthly basic + dearness allowance (not your full CTC).
  • 15 / 26 = 15 days of wages for each completed year, based on a 26-day working month.
  • Years of service = completed years (see rounding below).

Example: last drawn basic+DA of ₹50,000 and 10 years of service → ₹50,000 × 15/26 × 10 = ₹2,88,462.

How part-years are counted

A year counts as complete if you worked more than 6 months in it. So:

  • 7 years 8 months → counted as 8 years.
  • 7 years 4 months → counted as 7 years.

How much gratuity is tax-free?

For employees covered by the Act, gratuity is tax-free up to ₹20 lakh (a lifetime limit across employers). Anything above ₹20 lakh is added to your income and taxed at your slab rate. For most people, the entire gratuity falls within the limit and is completely tax-free.

Common questions

Is gratuity part of my CTC?

Sometimes employers include a gratuity provision in your CTC. That doesn't mean you get it before 5 years — it's still governed by the eligibility rules. It's another reason CTC overstates what you'll actually receive year to year.

What salary is used — basic or gross?

Only basic + dearness allowance, not your full salary or CTC. That's why gratuity is smaller than people expect if their basic is a low share of CTC.

When is it paid?

Employers are required to pay gratuity within 30 days of it becoming due after you leave.

To see your own number, plug your last drawn basic+DA and years of service into the gratuity calculator below — it applies the 15/26 formula and flags the ₹20 lakh tax-free limit automatically.