India Gratuity: Complete 2026 Guide & Eligibility
Everything an Indian employee needs to know about gratuity — eligibility, the 15/26 formula, the ₹20 lakh cap and tax, in one place.
Gratuity is one of the most valuable — and most misunderstood — payments an Indian employee receives when they leave a job. It rewards long service with a single, largely tax-free lump sum, and it is a statutory right, not a favour from your employer. This complete guide explains who qualifies, exactly how the amount is worked out, the ₹20 lakh cap, and the tax treatment, all based on the formula our India Gratuity Calculator implements.
What is gratuity, and which law governs it?
Gratuity in India is governed by the Payment of Gratuity Act, 1972. The Act applies to factories, mines, oilfields, plantations, ports, railways, shops and establishments employing 10 or more persons. Once an establishment is covered, it stays covered even if its headcount later drops below ten. Employees of smaller establishments may still receive gratuity, but as a contractual benefit rather than a statutory entitlement.
Who is eligible? The five-year rule
The headline condition is five years of continuous service with the same employer. There is one important exception: the five-year requirement is waived if service ends due to death or disablement. In those cases gratuity is payable regardless of how long the employee had worked, and on death it is paid to the nominee or legal heir.
"Continuous service" has a technical meaning — authorised leave, lay-offs, strikes that are not illegal, and accident-related absence generally do not break it. This is why the "did I really complete five years?" question can be more nuanced than a simple calendar count.
The gratuity formula
For employees covered by the Act, the calculation is:
Gratuity = (Last drawn salary × 15 × completed years) ÷ 26
- Last drawn salary means basic salary + dearness allowance (DA) — not your full cost-to-company (CTC), and not gross pay including HRA and other allowances.
- 15 represents 15 days of wages for each completed year of service.
- 26 is the assumed number of working days in a month, so salary ÷ 26 gives your daily wage.
How completed years are counted (the rounding rule)
Only completed years count, but a part-year is rounded based on the six-month rule: a fraction of more than six months rounds up to a full year, while six months or less is dropped. So 7 years 7 months counts as 8 years; 7 years 5 months counts as 7 years.
The ₹20 lakh cap and tax treatment
Statutory gratuity is capped at ₹20,00,000 (₹20 lakh). For non-government employees this cap is also the ceiling for the income-tax exemption — gratuity up to the lower of the actual amount, the formula amount, or ₹20 lakh is tax-free. Amounts above the cap are taxable as salary income. Government employees receive gratuity fully tax-free.
Worked example
| Input | Value |
|---|---|
| Last drawn basic + DA | ₹40,000/month |
| Completed years of service | 10 years |
| Formula | (40,000 × 15 × 10) ÷ 26 |
| Gratuity | ₹2,30,769 |
The result is comfortably below the ₹20 lakh cap, so the whole amount is tax-free. You can reproduce and adjust this on the India Gratuity Calculator, and see the same formula explained on our India gratuity guide.
Common misunderstandings
- Using CTC or gross salary. The single most common error — only basic + DA is used, which is usually far lower than gross.
- Assuming a flat 15/26 across everything. It is 15 days per completed year, with the six-month rounding, not a smooth pro-rata for every month.
- Forgetting the cap. Very long-tenured, high-basic employees can hit ₹20 lakh before the raw formula suggests.
If you are also owed unused leave, pair this with the India Leave Encashment Calculator to see your full exit payout.
For the underlying law, the full text of the Act is on India's official code repository: Payment of Gratuity Act, 1972 (IndiaCode), published by the Ministry of Labour & Employment.
Where gratuity fits in your full and final settlement
Gratuity is only one line in an Indian employee's exit payout. A typical full-and-final (FnF) settlement also includes your last month's salary, pro-rated allowances, any performance bonus due, reimbursement of approved expenses, and — importantly — the cash value of your unused earned leave. That leave payout is a separate calculation with its own tax rule; estimate it on the India Leave Encashment Calculator. Treating gratuity and leave encashment as one number is a common reason settlements look "wrong" at first glance.
How and when gratuity is paid
Once your employment ends, gratuity generally becomes payable within 30 days. You (or your nominee, in the case of death) submit a written application to the employer, who must then determine the amount and arrange payment. If the employer delays beyond the statutory window without valid reason, simple interest can become payable on the delayed amount. It is worth filing your nomination form (Form F) early in your employment so that, in the worst case, the benefit reaches the right person without dispute.
Covered vs non-covered employees
The 15/26 formula above is the one used for employees covered by the Payment of Gratuity Act. Some employees of establishments outside the Act may receive gratuity under a different, contract-based basis (often using a divisor of 30 rather than 26). If your establishment is not covered, check your appointment terms — the payout can differ from the statutory figure. Our calculator implements the standard statutory 15/26 basis, which is the right starting point for the large majority of Indian employees.
Why gratuity is worth planning around
Because gratuity rewards completed years and rounds a part-year over six months up to a full year, the difference between leaving just before and just after a service anniversary — or just before and just after crossing the six-month mark into the next year — can be a full 15 days of wages. If you are voluntarily timing an exit and are close to such a boundary, running both scenarios on the gratuity calculator before you resign can be genuinely worthwhile.
Frequently asked questions
How is gratuity calculated in India?
Gratuity = (last drawn basic salary + dearness allowance × 15 × completed years) ÷ 26. You must complete five years of continuous service, and a part-year of more than six months rounds up to a full year.
Who is eligible for gratuity in India?
Employees with at least five years of continuous service in an establishment covered by the Payment of Gratuity Act, 1972 (10 or more employees). The five-year rule is waived if service ends due to death or disablement.
Is gratuity tax-free in India?
For non-government employees, gratuity is exempt up to the lower of the actual amount, the formula amount, or ₹20,00,000 (₹20 lakh). Amounts above that are taxable as salary. Government employees receive it fully tax-free.
Which salary is used for the gratuity calculation?
Only your last drawn basic salary plus dearness allowance — not your full CTC and not gross pay including HRA and other allowances.
Does resigning affect my India gratuity?
No. Whether you resign or are terminated, once you have completed five years of continuous service the same formula applies. There is no resignation reduction under the Payment of Gratuity Act.