How to Calculate Gratuity in India (Formula & Examples)
Gratuity is a lump sum an employer pays an employee as a thank-you for long service. It's not a bonus you can skip — for most establishments it's governed by the Payment of Gratuity Act, 1972 — so it's worth understanding exactly who qualifies and how the number is worked out.
Important: the rules and tax limits below are the widely-applied ones, but statutory thresholds change. Treat this as an explainer and confirm the current figures with your finance or compliance team before you pay out.
Who is eligible for gratuity?
Under the Act, an employee generally becomes eligible for gratuity after five years of continuous service with the same employer. It's payable on:
- Resignation or retirement after completing five years, or
- Death or disablement — in which case the five-year condition doesn't apply.
The Act covers establishments with 10 or more employees. Once covered, an establishment stays covered even if the headcount later drops.
The gratuity formula
For employees covered by the Act, gratuity is calculated as:
Gratuity = (15 × last drawn salary × years of service) / 26
Where:
- Last drawn salary = basic salary + dearness allowance (DA)
- 26 represents the working days in a month
- 15 represents 15 days' wages for each completed year of service
Service of more than six months in the final year is rounded up to a full year; six months or less is dropped.
A worked example
Say an employee's last drawn salary (basic + DA) is ₹50,000 and they've completed 8 years and 7 months of service:
- Years of service, rounded: 9 (7 months rounds up)
- Gratuity = (15 × 50,000 × 9) / 26 = ₹2,59,615
If the same person had served 8 years and 4 months, it would round down to 8 years:
- Gratuity = (15 × 50,000 × 8) / 26 = ₹2,30,769
That single rounding boundary — six months — is where most manual miscalculations happen.
Employees not covered by the Act
For establishments not covered by the Act, gratuity (where offered) is commonly calculated as:
Gratuity = (15 × last drawn salary × years of service) / 30
Here the last drawn salary is typically the average of the last 10 months, the divisor is 30 (calendar days), and part-years are not rounded up.
How gratuity is taxed
Gratuity enjoys a tax exemption up to a ceiling, with the exempt amount being the least of:
- the actual gratuity received,
- the statutory ceiling (a lakh-value cap set by the government), or
- the amount worked out by the Act's formula.
The exact ceiling has been revised over the years, so confirm the current limit before finalising an employee's tax treatment.
Where employers get it wrong
- Wrong "salary" base. Gratuity uses basic + DA, not gross or CTC. Using gross inflates every payout.
- The rounding rule. Getting the six-month boundary wrong changes the number by a full year's worth.
- Manual tracking of service dates. Joining dates in a spreadsheet drift; the tenure is only as accurate as the record.
How HRDesk24 helps
Because HRDesk24 holds each employee's accurate joining date, salary structure and the basic + DA split, the inputs to a gratuity calculation are already correct and current — so working out a final settlement isn't a spreadsheet archaeology exercise. Gratuity typically forms part of an employee's full and final settlement on exit.
Want to see it with your own salary structures? Book a demo and we'll walk through it.