Gratuity Calculation in India: Formula, Eligibility & Tax Guide (2025)
Gratuity is a lump-sum retirement benefit payable after 5 years of continuous service. Understanding the formula, the 240-day rule, and the ₹20 lakh tax exemption helps you plan your exit confidently.
What is Gratuity?
Gratuity is a lump-sum payment by an employer in recognition of long service. It is governed by the Payment of Gratuity Act, 1972, which applies to establishments with 10+ employees. It becomes payable on retirement, resignation after 5 years, death, or disablement.
Eligibility Conditions
- Minimum 5 years of continuous service with the same employer
- The 5-year requirement is waived in cases of death or disablement
- Applies to factories, mines, oilfields, plantations, ports, railways, shops, and IT companies
Gratuity Calculation Formula
Where: 15/26 = 15 working days ÷ 26 working days per month. Years rounded to the nearest half-year (6+ months in a year counts as full year). Maximum: ₹20,00,000.
Worked Examples
| Scenario | Basic+DA | Years | Gratuity |
|---|---|---|---|
| 5 years service | ₹30,000 | 5 | 30,000 × 15/26 × 5 = ₹86,538 |
| 10 years service | ₹50,000 | 10 | 50,000 × 15/26 × 10 = ₹2,88,462 |
| 20 years service | ₹80,000 | 20 | 80,000 × 15/26 × 20 = ₹9,23,077 |
| 30 years (high salary) | ₹1,50,000 | 30 | Capped at ₹20,00,000 |
Gratuity Provision in CTC
Many companies include gratuity in CTC even though it is not paid monthly:
This 4.81% (= 15/26 ÷ 12) appears in your CTC breakup, creating a visible gap between CTC and gross salary.
Tax Exemption on Gratuity
| Employee Type | Tax Exemption |
|---|---|
| Government employees | Fully exempt — no limit |
| Private sector (Gratuity Act covered) | Exempt up to ₹20,00,000 |
For most employees, the entire gratuity amount is tax-free. Only amounts above ₹20 lakh are taxed at applicable slab rates.
Payment Timeline
Gratuity must be paid within 30 days of becoming due. Late payment attracts interest. Employees can approach the Controlling Authority (Labour Commissioner) if gratuity is withheld.
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