How gratuity is calculated
Gratuity is a lump-sum benefit your employer pays you as a token of appreciation for continuous service, usually when you leave the organisation after completing a minimum period of service. It is governed by the Payment of Gratuity Act, 1972, which applies to every factory, mine, plantation, port, and any establishment with 10 or more employees — including most private companies, shops, and offices.
The 15/26 formula (covered employees)
For employees covered under the Act, gratuity is calculated as:
Gratuity = Last drawn salary (Basic + DA) × 15/26 × years of service
The "26" represents the number of working days in a month (a 6-day work week), and "15" is half a month's wages for each completed year of service. There's an important rounding rule here: if your service period includes 6 months or more beyond a completed year, it's rounded UP to the next whole year; if it's less than 6 months, it's rounded DOWN. So 7 years 7 months counts as 8 years, while 7 years 5 months counts as 7 years.
The 15/30 formula (employees not covered under the Act)
Employees not covered under the Act (for example, those at establishments with fewer than 10 employees) can still receive gratuity as a matter of employer policy, but the calculation differs slightly:
Gratuity = Last drawn salary (Basic + DA) × 15/30 × years of service
Here "30" is used as an approximation of days in a month, and — importantly — there isno 6-month rounding rule. The exact, decimal number of years of service is used directly in the formula.
The 5-year minimum service rule — and its exception
In general, you must complete at least 5 years of continuous service to be eligible for gratuity. This minimum is waived in one situation: if employment ends due to thedeath or disablement of the employee, gratuity becomes payable regardless of how long the person had worked.
Tax exemption on gratuity received
Under Section 10(10) of the Income Tax Act:
- Government employees (central, state, or local authority) — gratuity is fully exempt from tax, with no monetary cap.
- Non-government employees — exemption is capped at ₹20 lakh, but crucially this cap is a lifetime aggregate across every employer you've ever received gratuity from, not a fresh ₹20 lakh allowance for each job. Any exemption you've already used against gratuity from a previous employer reduces the exemption available on gratuity from your current or future employers.
Whatever portion of your gratuity exceeds the exemption becomes taxable, added to your income for that financial year and taxed at your applicable slab rate — it is not taxed separately or at a special rate. See thein-hand salary calculator to work out the actual tax on the taxable portion alongside the rest of your income.
Why 15/26 and not 15/30
For employees covered under the Payment of Gratuity Act, the formula divides by 26 instead of 30 because it counts only working days in a month, excluding the typical 4 weekly-off days — so "15 days of wages" per year of service is calculated as 15/26th of a month's salary. Employees not covered under the Act (usually because their establishment has fewer than 10 employees) use a plainer 15/30 calendar-day formula instead, with no rounding of years and generally a less favourable outcome for the same tenure.
Gratuity as part of your CTC
Many CTC structures show an annual gratuity accrual figure — this is your employer setting aside roughly 4.81% of basic pay every year (the actuarial approximation of the 15/26 formula) as a provision, not cash you can access. It only becomes real money if you actually complete the minimum eligible service and then leave the company, which is worth remembering when comparing two job offers with different CTC break-ups.