Gratuity is a lump-sum amount paid by an employer to an employee as a reward for long-term service. In India, gratuity is governed by the Payment of Gratuity Act and becomes payable after completing a minimum period of service.
Understanding gratuity calculation in India helps employees estimate how much they will receive when they resign, retire, or leave a job.
Gratuity Eligibility in India
An employee becomes eligible for gratuity if:
- They have completed 5 or more years of continuous service
- Employment ends due to:
- Resignation
- Retirement
- Superannuation
- Termination
Special cases
- In case of death or permanent disability, the 5-year rule does not apply
- Gratuity is paid to the employee or their nominee/legal heir
Gratuity Calculation Formula in India
For employees covered under the Payment of Gratuity Act, the formula is:
Gratuity = (Last drawn salary × 15 × Number of years of service) ÷ 26
What is “last drawn salary”?
It includes:
- Basic salary
- Dearness allowance (if applicable)
Your basic salary also plays an important role in other components like provident fund and salary breakup.
Example:
If your last drawn monthly salary is ₹50,000 and you worked for 6 years:
- Gratuity = (50,000 × 15 × 6) ÷ 26 ≈ ₹1,73,077
Is gratuity taxable?
- Gratuity is partially or fully tax-exempt, depending on rules and limits
- Government employees usually get full exemption
When is gratuity paid?
Gratuity is usually paid within 30 days of leaving the organization.
Who is NOT eligible for gratuity?
An employee may not be eligible for gratuity if:
- They have completed less than 5 years of service (except death/disability)
- They are interns or trainees (in most cases)
- They are contractual workers, depending on the contract terms
- They leave due to misconduct involving moral turpitude
Eligibility ultimately depends on the employer’s applicability under the law.
What is “Continuous Service”?
Continuous service does not mean working every single day without breaks.
It generally includes:
- Paid leave
- Sick leave
- Casual leave
- Maternity leave
- Temporary absence approved by the employer
Short breaks or approved leaves usually do not break continuity of service.
Gratuity vs Provident Fund (PF)
| Gratuity | Provident Fund |
| Paid only by employer | Contributed by both employee & employer |
| Paid at exit | Paid at exit or partial withdrawal |
| Requires 5 years of service | No minimum service requirement |
Provident Fund (PF) is another long-term retirement benefit where both employee and employer contribute monthly.
Both are important long-term employee benefits.
What happens to gratuity if you resign before 5 years?
In most cases:
- Gratuity is not payable if you resign before completing 5 years
- Some companies may offer an ex-gratia payment, but this is not legal gratuity
- Always check your appointment letter or HR policy for clarity.
Is Gratuity Taxable in India?
Gratuity is partially or fully tax-exempt, depending on:
- Whether you are a government or private employee
- The amount received
- Applicable exemption limits under income tax laws
The tax treatment depends on income tax rules and applicable income tax slabs. Government employees usually receive full tax exemption on gratuity.
Is Gratuity Mandatory in India?
Gratuity is mandatory for companies covered under the Payment of Gratuity Act, 1972, if they have 10 or more employees.
Once an employee becomes eligible, gratuity payment is a legal right.
Frequently Asked Questions
What is gratuity in simple words?
Gratuity is a lump-sum amount paid by an employer to an employee as a reward for completing long-term service.
How is gratuity calculated in India?
Gratuity is calculated as:
(Last drawn salary × 15 × years of service) ÷ 26
Is gratuity taxable?
Gratuity is partially or fully tax-exempt depending on the type of employee and income tax rules.
Can I get gratuity before 5 years?
Normally no, except in cases of death or permanent disability.
Simple Takeaways
Gratuity is a one-time benefit paid by employers to employees who complete long-term service. Understanding gratuity rules helps you plan better when changing jobs or retiring.
Gratuity is part of your overall compensation and is often included in CTC vs Take-Home Salary calculations.
About the Author
Shivakar Singh is the founder of Benefits Explained Simple, an educational platform focused on simplifying health insurance, workplace benefits, and financial decision-making. His work focuses on explaining complex benefit structures in clear, practical frameworks for working professionals.
This article is part of our Salary & Tax related guide.