🇮🇳 India · Gratuity Act 1972 · FY 2025-26
Gratuity Formula India 2025-26: 5-Year Rule, 6-Month Rounding & ₹20 Lakh Tax Exemption
May 11, 2026Updated Jun 16, 202610 min readBy CalVerse
An employee with ₹50,000 monthly basic salary who resigns after 10 years and 7 months gets ₹3,26,923 in gratuity — completely tax-free. The same person resigning after 10 years and 4 months gets only ₹2,88,462 — because the 6-month rounding rule doesn't kick in. Most people don't know these rules. This article breaks them all down with real numbers.
What is Gratuity?
Gratuity is a statutory retirement benefit paid by employers to employees who have completed at least 5 years of continuous service. It's governed by the Payment of Gratuity Act, 1972 and is mandatory for any organisation with 10 or more employees. Think of it as the employer's reward for your loyalty — 15 days of salary for every year you worked.
The Gratuity Formula — Two Versions
The number 15 represents 15 days of salary per year of service. The number 26 represents working days in a month (excluding 4 Sundays). Government and certain non-covered employees get 30 days per year instead of 15 — double the benefit.
⚠️ HRA and Bonus Are NOT Included
Gratuity is calculated only on Basic Salary + Dearness Allowance. HRA, special allowance, performance bonus, overtime, and all other components are completely excluded. This is why your gratuity amount is almost always lower than people expect — it's based on basic, not CTC or gross salary.
Real Example — ₹50,000 Basic, 10 Years Service
Example: 10 years 7 months service — ₹50,000 basic salary
Last Monthly Basic + DA₹50,000
Years of Service10 years 7 months
Months beyond 10 years7 months (≥6 → rounds up to 11)
Effective Years for Calculation11 years
Gratuity = (₹50,000 × 15 × 11) / 26₹8,25,000 / 26
Gratuity Amount₹3,17,308
Tax Exempt (below ₹20L limit)₹3,17,308 — 100% tax-free ✓
₹3.17L
10 yrs 7 mo (rounds to 11)
₹2.88L
10 yrs 4 mo (stays at 10)
₹28,846
Difference — 3 months matters
Those 3 extra months cost ₹28,846. This is why knowing the 6-month rounding rule matters — if you're planning to resign and you're at 10 years 4 months, waiting until 10 years 6 months earns you ₹28,846 for free.
Calculate your exact gratuity
Enter your basic salary, years of service and organisation type — get exact gratuity, tax exemption and eligibility instantly.
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The 5-Year Rule — And the Critical Exception
Minimum 5 years of continuous service is required for gratuity eligibility in case of voluntary resignation. No 5 years — no gratuity. Period. But there's one major exception most people don't know:
✓ Exception — Death and Permanent Disability
If an employee dies or suffers permanent disability while in service, gratuity is payable regardless of years worked — even on day one of employment. The nominee or the employee receives gratuity calculated on the actual years served. No 5-year minimum applies in these cases.
The 6-Month Rounding Rule — Explained Simply
The rounding rule applies to months beyond the last complete year:
- Less than 6 months extra → ignored, counted as the lower year
- 6 months or more extra → rounds up to the next full year
So 8 years 5 months = 8 years for calculation. 8 years 6 months = 9 years for calculation. This rule applies for resignation and retirement. For death/disability, actual months served are used.
Gratuity Across Different Service Periods — ₹50,000 Basic
5 years
₹1,44,231 gratuity
Minimum eligibility · (50000 × 15 × 5) / 26 · 100% tax-free
10 years
₹2,88,462 gratuity
(50000 × 15 × 10) / 26 · 100% tax-free · Doubles from 5-year amount
15 years
₹4,32,692 gratuity
(50000 × 15 × 15) / 26 · 100% tax-free · Standard career milestone
20 years
₹5,76,923 gratuity
(50000 × 15 × 20) / 26 · Still fully tax-free under ₹20L limit
35 years
₹10,09,615 gratuity
Full career · Still under ₹20L tax-free limit · Max tax-free gratuity needs ₹86,667 basic
The ₹20 Lakh Tax Exemption — Section 10(10)
Gratuity received by private sector employees is completely tax-free up to ₹20 lakhs under Section 10(10) of the Income Tax Act. Any amount above ₹20 lakhs is taxable at your income slab rate in the year of receipt.
📊 Who Actually Gets Taxed on Gratuity?
At ₹50,000 basic salary, you'd need to serve 35 years to reach ₹10 lakhs in gratuity — still well under the ₹20L limit. For most private sector employees, gratuity is entirely tax-free. You'd need a basic salary of ₹86,667/month and 35 years of service to hit the ₹20L limit. Government employees enjoy unlimited tax-free gratuity with no upper cap.
When Must the Employer Pay Gratuity?
- Employer must pay within 30 days of resignation/retirement/death
- If delayed, employer must pay simple interest at the government-prescribed rate
- Employee can file a claim with the Controlling Authority under the Gratuity Act if payment is refused or delayed
- Employer must send a gratuity notice within 15 days of receiving the resignation
- Wilful non-payment is a criminal offence under the Act — employer can face imprisonment
⚠️ If Your Employer Refuses to Pay
File a written application with the Controlling Authority (Labour Commissioner) in your district. Attach your appointment letter, salary slips, and resignation acceptance. The authority can order payment with interest. This is a legal right — you don't need a lawyer to file the initial complaint.
Gratuity vs PF vs Leave Encashment — What You Get on Leaving
When you leave a job after 5+ years, three separate payments may be due:
- Gratuity — statutory benefit, 15/26 × basic × years — tax-free up to ₹20L
- PF withdrawal — your accumulated PF corpus — tax-free if withdrawn after 5 years of continuous service
- Leave encashment — payment for unused earned leave — partially tax-free (up to ₹25L for private sector employees)
Together these three can amount to a significant corpus on a long career exit — especially if you've been with one company for 15+ years at a decent salary.
5 Gratuity Mistakes That Cost People Money
Mistake #1 — Resigning at 4 years 11 months
ScenarioLeft job at 4Y 11M with ₹60,000 basic
Gratuity received₹0
Gratuity at 5Y 0M₹1,73,077
Cost of leaving 1 month early₹1,73,077 forfeited
Mistake #2 — Resigning at 7 years 5 months instead of 7 years 6 months
At 7Y 5M (rounds down to 7)Gratuity = (₹60,000 × 15 × 7) / 26 = ₹2,42,308
At 7Y 6M (rounds up to 8)Gratuity = (₹60,000 × 15 × 8) / 26 = ₹2,76,923
1 month difference₹34,615 extra — for waiting 1 month
⚠️ Mistake #3 — Calculating on CTC or Gross Salary
Gratuity is based only on Basic + DA. If your CTC is ₹15L/year but your basic is ₹4L/year (common in startup-style packages with high allowances), your gratuity is calculated on ₹4L — not ₹15L. Always check your appointment letter for the specific basic salary component. A high CTC with a low basic is a gratuity disadvantage.
⚠️ Mistake #4 — Accepting "Ex-gratia" Without Filing a Claim
Some employers offer an ex-gratia payment that's lower than the statutory gratuity amount. Employees often accept this thinking it's equivalent. If you're entitled to ₹3,50,000 under the Act but the employer offers ₹2,00,000 as "ex-gratia," you have every right to file a claim for the full statutory amount. Don't sign any release unless you're confident the ex-gratia equals or exceeds your legal entitlement.
⚠️ Mistake #5 — Waiting Too Long to File a Dispute
Under Section 7 of the Payment of Gratuity Act, the employee has one year from the date when gratuity became payable to file a claim with the Controlling Authority. If you miss this window, you may lose the ability to enforce your claim. File within 30 days of your notice period ending if the employer hasn't paid — don't wait months hoping they'll "sort it out."
How Gratuity Stacks Up — Private vs Government vs Non-Covered Employees
15/26
Private / Act-Covered · ₹20L tax-free cap
30/26
Govt / Non-Covered · No tax cap — fully exempt
No cap
Govt employees — entire amount tax-free
Gratuity Calculator — Frequently Asked Questions
What if I resign exactly at 4 years 11 months?
You are not eligible for gratuity. The minimum is 5 complete years of continuous service for resignation. 4 years 11 months does not qualify — even by one month. Some companies pay ex-gratia (voluntary gratuity) for close cases, but there is no legal entitlement. If you can, wait one month — it makes a significant financial difference.
Is gratuity deducted from my salary every month?
No. Gratuity is not deducted from your salary. It's an employer obligation funded entirely by the company. However, many employers include "gratuity provision" (4.81% of basic) as part of your CTC to show the true cost of employing you. This provision shows up in your CTC breakup but is never deducted from your monthly salary — it accumulates as a liability on the employer's books until you leave.
Does job change reset the gratuity clock?
Yes. Gratuity is calculated per employer. When you change companies, your gratuity from the previous employer is paid out (if eligible) and the clock resets at zero with the new employer. There is no portability of gratuity years across employers. This is why long tenures at single companies generate significantly more gratuity than frequent job changes.
What happens to gratuity if the company shuts down?
Gratuity is a first charge on company assets — meaning it must be paid before most other creditors during liquidation. Companies with 500+ employees must maintain a gratuity fund or take a group gratuity insurance policy. For smaller companies, the statutory gratuity liability is still enforceable through the Controlling Authority even if the company closes.
How is gratuity calculated if I had a salary hike in my last year?
Gratuity uses the last drawn basic + DA at the time of leaving — not an average. So if you got a raise two months before resigning, the full gratuity is calculated on the new, higher basic salary for all years served. This is why a salary hike shortly before a long-tenure exit significantly increases gratuity.