Gratuity Calculator
Calculate your gratuity amount instantly with detailed tax treatment breakdown
Understanding Gratuity in India
Gratuity is a statutory benefit paid by an employer to an employee as a token of appreciation for services rendered. It is governed by the Payment of Gratuity Act, 1972 and applies to establishments with 10 or more employees. The amount depends on the employee's last drawn salary, years of service, and whether the establishment is covered under the Act.
Gratuity Formula
For Act-covered employees: (Last Drawn Salary x 15 x Years of Service) / 26. For non-covered employees: (Last Drawn Salary x 15 x Years of Service) / 30. Last Drawn Salary includes Basic Pay and Dearness Allowance (DA). The factor 15 represents half-month's wages, and 26 represents working days in a month.
Eligibility Criteria
An employee must complete a minimum of 5 years of continuous service to be eligible for gratuity. If the service period exceeds 6 months in the last year, it is rounded up to the next full year. The 5-year requirement is waived in cases of death or disablement of the employee.
Tax Treatment
Government employees receive fully tax-exempt gratuity. For private sector employees covered under the Act, gratuity is exempt up to Rs. 25 lakhs under Section 10(10) of the Income Tax Act. Any excess amount is taxable as per the applicable income tax slab of the employee.
Recent Changes
The Payment of Gratuity (Amendment) Act, 2018 increased the tax-free gratuity ceiling from Rs. 20 lakhs to Rs. 25 lakhs. The government has also empowered itself to increase the ceiling further through executive notification without requiring a legislative amendment.
Frequently Asked Questions
For employees covered under the Payment of Gratuity Act, the formula is: Gratuity = (Last Drawn Salary x 15 x Years of Service) / 26. For employees not covered under the Act, the divisor is 30 instead of 26. Last Drawn Salary includes Basic Salary and Dearness Allowance (DA). The number 15 represents half a month's wages, and 26 represents the working days in a month.
An employee is eligible for gratuity after completing 5 years of continuous service with the same employer. However, in case of death or disablement, the 5-year condition is relaxed. If an employee has worked for 4 years and 7 months or more, it is rounded up to 5 years for eligibility purposes.
The maximum gratuity payable under the Payment of Gratuity Act is Rs. 25,00,000 (Twenty-Five Lakhs). This limit was increased from Rs. 20 lakhs effective March 29, 2018. The government can further increase this ceiling through notification without requiring a legislative amendment.
For government employees (Central, State, or Local Authority), gratuity received is fully exempt from income tax. For private sector employees covered under the Act, gratuity is exempt up to Rs. 25 lakhs under Section 10(10) of the Income Tax Act. Any amount exceeding Rs. 25 lakhs is taxable as per the employee's income tax slab.
The Payment of Gratuity Act, 1972 applies to establishments employing 10 or more persons on any day in the preceding 12 months. This includes factories, mines, oilfields, plantations, ports, railways, shops, and other establishments. Once applicable, the Act continues to apply even if the employee count later falls below 10.
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