Gratuity Formula in India
There are two formulas depending on whether your employer is covered under the Payment of Gratuity Act 1972:
| Employee Type | Formula | Divisor |
|---|---|---|
| Covered by Payment of Gratuity Act | Basic + DA × 15 × Years | ÷ 26 |
| Not covered by Act (small employers) | Basic + DA × 15 × Years | ÷ 30 |
The 26-day divisor is used for Act-covered employees because it assumes 4 Sundays off per month (30 - 4 = 26 working days). The 15-day numerator gives half a month's salary per year of service.
Gratuity Tax Rules
- Government employees -- gratuity is fully tax-exempt with no upper limit.
- Private sector (covered by Act) -- gratuity up to Rs. 20 lakhs is fully exempt. Amount above Rs. 20 lakhs is taxable as income.
- Private sector (not covered) -- exempt is the least of: actual gratuity, half month's salary per year, or Rs. 20 lakhs.
Gratuity Eligibility
You must complete a minimum of 5 continuous years of service to become eligible for gratuity. However, gratuity is paid regardless of service duration in case of death or disability of the employee.
For the purpose of calculating years, if you have completed more than 6 months in the last year, it rounds up to the next full year. So 10 years and 7 months counts as 11 years.
Example Calculation
| Detail | Value |
|---|---|
| Monthly Basic + DA | Rs. 50,000 |
| Years of Service | 10 years |
| Formula (Act covered) | 50,000 × 15 ÷ 26 × 10 |
| Gratuity Payable | Rs. 2,88,462 |
| Tax Status | Fully exempt (below Rs. 20L limit) |