Gratuity is the one retirement benefit almost every Indian employee is entitled to and almost nobody calculates correctly. It is a lump sum your employer pays when you leave after a qualifying period — a thank-you mandated by the Payment of Gratuity Act, 1972, now folded into the Code on Social Security, 2020 (in force since November 2025).
Who is eligible
- Employees of any establishment with 10 or more employees (once covered, always covered).
- 5 years of continuous service — on resignation, retirement, retrenchment or termination (not for misconduct causing loss).
- No minimum service for death or disablement — gratuity is paid to the nominee.
- Fixed-term employees: 1 year of continuous service, pro-rata, under the Social Security Code. A worker on back-to-back 11-month contracts now accrues gratuity.
"4 years 240 days": courts (Madras HC, and followed by several others) have held that 4 years plus 240 days in the fifth year counts as 5 years. Many employers honour it; some don't without a fight. Our calculator treats 4 years 8 months as eligible and flags it.
The formula
Covered establishments (Act applies):
Gratuity = last drawn (basic + DA) × 15 ÷ 26 × years of service
- "15 days' wages for every completed year", with a month taken as 26 working days.
- A part-year above 6 months rounds up to a full year; 6 months or less is ignored.
Not covered by the Act:
Gratuity = last drawn (basic + DA) × 15 ÷ 30 × years of service
with no rounding-up.
Example
Last basic + DA ₹45,000; service 7 years 8 months → counts as 8 years. Gratuity = 45,000 × 15 ÷ 26 × 8 = ₹2,07,692.
Because the Labour Codes push basic + DA to at least 50% of CTC, gratuity amounts have risen for many employees restructured in 2025–26.
The tax rules
- Government employees: fully exempt.
- Private employees under the Act: exempt up to ₹20 lakh (lifetime), or the actual gratuity or the formula amount, whichever is lowest.
- Not under the Act: exempt up to ₹20 lakh, computed with the 15/30 formula on average salary of the last 10 months.
- Anything above the exemption is taxed as salary in the year of receipt.
Gratuity received on death is fully exempt for the nominee.
Employer obligations
- Pay within 30 days of it becoming due; after that, simple interest at the notified rate (currently 10%) applies.
- Nomination forms (Form F) must be collected at joining.
- Many employers fund gratuity through an LIC group gratuity scheme; the provision is 4.81% of basic per month — see the employee cost calculator.
- Gratuity can be forfeited only for termination due to wilful misconduct, riotous behaviour or moral turpitude — and only to the extent of the loss caused.
Common disputes
- "Basic was kept low so gratuity is small." Under the Labour Codes this is no longer possible; the 50% rule applies.
- "You left 2 months short of 5 years." Cite the 240-day rule; file with the Controlling Authority (Labour Commissioner) if refused. There is a 90-day limit to apply, extendable for sufficient cause.
- "Gratuity is included in CTC so it's already paid." Including it in CTC is a provisioning practice; the money is still payable on exit.
FAQ
Is gratuity paid if I resign?
Yes, after 5 years of continuous service (1 year for fixed-term employment).
Does notice period count toward the 5 years?
Yes, if served. Service counts till the last working day.
Is gratuity part of CTC?
Employers often show a 4.81% provision in CTC. It is still payable only on exit after the qualifying period.
How do I claim gratuity?
Submit Form I to the employer within 30 days of leaving. The employer must pay within 30 days; otherwise approach the Controlling Authority.