India Gratuity Eligibility: The 5-Year Rule, 15/26 Formula & ₹20 Lakh Cap
India's gratuity rewards long service with a tax-advantaged lump sum — but only after you cross five years. Here is the eligibility rule, the formula and the cap.
Under India's Payment of Gratuity Act, gratuity is a statutory lump sum paid to employees who have put in long service. The rules on who qualifies, how it is figured, and how much is tax-free are precise, so they are worth getting right.
The five-year eligibility rule
You must complete five years of continuous service with the same employer to be eligible for gratuity. The only exception is death or disablement, where the five-year requirement is waived and gratuity is payable regardless of tenure.
The 15/26 formula
Gratuity is calculated as:
(Last drawn salary × 15 × completed years) ÷ 26
- Salary means basic + dearness allowance (DA) — not your full CTC.
- The 15 represents 15 days of wages for each completed year.
- The 26 is the assumed number of working days in a month.
Part-year rounding
A part-year is rounded up if it exceeds six months, otherwise rounded down. So 5 years and 7 months counts as 6 years; 5 years and 5 months counts as 5.
The ₹20 lakh cap
Gratuity is capped — and tax-free — up to ₹20,00,000 (20 lakh). Anything a generous employer pays above the statutory formula may be taxable beyond that ceiling.
Worked example
An employee whose last drawn salary (basic + DA) is ₹40,000, with 10 completed years:
- Gratuity = (40,000 × 15 × 10) ÷ 26 = ₹2,30,769
- That is well under the ₹20 lakh ceiling, so it is fully tax-free.
Second example with part-year rounding
An employee on ₹25,000 (basic + DA) who has served 6 years and 8 months. Because the 8 months exceeds six months, service rounds up to 7 years:
- Gratuity = (25,000 × 15 × 7) ÷ 26 = ₹1,00,962
Had they left at 6 years and 5 months instead, service would round down to 6 years, giving (25,000 × 15 × 6) ÷ 26 = ₹86,538 — so the timing of your exit around a six-month boundary genuinely changes the payout.
What "continuous service" means
The five-year clock is about continuous service with one employer. Authorised leave does not break it, but a genuine gap in employment can. The only time the five-year rule is set aside is death or disablement, where gratuity is payable whatever the tenure.
Tax treatment in brief
Gratuity received under the Payment of Gratuity Act is tax-exempt up to ₹20,00,000 (20 lakh) across your career. Amounts an employer pays above the statutory formula, or above that lifetime ceiling, can attract tax — so the cap is both a statutory limit and a tax threshold.
Calculate yours
The India Gratuity Calculator applies the 15/26 formula, the part-year rounding and the ₹20 lakh cap for you. See the India gratuity guide for statute detail. If you also work with — or compare against — Gulf packages, the basic vs total salary explainer shows why the wage base matters so much.
Frequently asked questions
How is gratuity calculated in India?
Last drawn salary (basic plus dearness allowance) × 15 × completed years ÷ 26. You must complete five years of service, and a part-year of more than six months rounds up to a full year.
What is the gratuity eligibility rule in India?
Five years of continuous service, except in cases of death or disablement, where the five-year requirement is waived.
Is there a limit on gratuity in India?
Yes. Gratuity is capped — and tax-exempt — up to ₹20,00,000 (20 lakh).
Which salary is used for Indian gratuity?
The last drawn basic salary plus dearness allowance (DA) — not your full CTC. The 26 in the formula represents the assumed working days in a month.
Is gratuity taxable in India?
Gratuity under the Payment of Gratuity Act is tax-exempt up to ₹20,00,000 (20 lakh) across your career. Amounts paid above the statutory formula, or above that lifetime ceiling, can be taxable.