Gratuity Calculation

For employees in India, gratuity is a significant terminal benefit paid by an employer as a token of appreciation for long service. Knowing how the gratuity calculation works helps you plan your finances and verify the amount you receive. As of 2026, the formula and rules under the Payment of Gratuity Act, 1972, remain largely stable, with the maximum payout capped at ₹20 lakh.

Gratuity Calculation Formula 2026

The gratuity amount for employees covered under the Payment of Gratuity Act is computed using a standard formula that factors in the last drawn salary and total years of service.

Formula: Gratuity = (Last drawn monthly salary × 15 × Completed years of service) / 26

Components:

  • Last drawn monthly salary = Basic pay + Dearness Allowance (DA). For calculation purposes, any other allowances are not included.
  • 15 days’ wages are derived by dividing the monthly salary by 26 (assumed number of working days in a month) and multiplying by 15.
  • Completed years of service are counted based on continuous service. A year is rounded up to the next full year if the employee has worked more than 6 months in that year. For instance, 7 years and 8 months of service will be treated as 8 years.

If the calculated gratuity exceeds ₹20 lakh, the employer is liable to pay only up to ₹20 lakh – the statutory maximum prescribed under the Payment of Gratuity (Amendment) Act, 2018.

For employees not covered by the Act but receiving gratuity under company policy, the tax-exempt amount (for income tax purposes) is the least of:

  • Actual gratuity received
  • ₹20 lakh
  • Half a month’s average salary for each completed year of service (based on the average salary of the last 10 months)

The employer may still pay a higher amount, but only the exempt portion avoids taxation.

Instantly Estimate Your Gratuity

To get a personalised estimate without manual computations, use the gratuity calculator. Provide your last drawn salary (basic + DA) and total years of service, and the tool instantly applies the formula and statutory limits.

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Example Calculation

Suppose an employee covered under the Act has a last drawn basic + DA of ₹60,000 and has completed 12 years and 7 months of continuous service.

  • Service duration for calculation: 12 years and 7 months → rounded to 13 years (since more than 6 months).
  • Gratuity = (60,000 × 15 × 13) / 26 = (60,000 × 195) / 26 = 11,700,000 / 26 = ₹450,000.
  • The amount is below ₹20 lakh, so the full ₹450,000 is payable.

If the same employee had a salary of ₹2,00,000 a month, the computed gratuity would be (2,00,000 × 15 × 13) / 26 = ₹15,00,000, still below the cap. Only when the formula yields over ₹20 lakh does the ceiling apply.

Who is Eligible for Gratuity in 2026?

Eligibility for statutory gratuity is governed by the Payment of Gratuity Act, 1972. The key conditions are:

  • The employee must have worked in an establishment that employs 10 or more persons. The Act applies to factories, mines, oilfields, plantations, ports, railway companies, and shops or other establishments as notified.
  • The employee must have completed 5 years of continuous service (including service with the same employer from the date of joining). Interruptions due to sickness, accident, leave, lay‑off, or strike do not break continuity.
  • The benefit is available upon superannuation, retirement, resignation, death, or disablement.

Exceptions to the 5‑year rule: If an employee dies or becomes disabled due to an accident or disease, the gratuity is payable irrespective of the length of service. The employer must pay the amount to the nominee or legal heir.

Income Tax Rules on Gratuity in 2026

Gratuity received by a government employee is fully exempt from tax. For non‑government employees covered under the Payment of Gratuity Act, the exemption under Section 10(10) of the Income Tax Act is the least of the following three amounts:

  1. Actual gratuity received
  2. ₹20 lakh (the aggregate lifetime exemption limit)
  3. Gratuity computed as per the formula (last drawn salary × 15/26 × completed years of service)

Any gratuity received above this least amount is added to the employee’s salary income and taxed at the applicable slab rate. For employees not covered by the Act, the third limb is replaced by the half‑month’s average salary method (average of last 10 months’ salary × completed years of service), while the other two limits stay the same.

The ₹20 lakh ceiling applies uniformly across all non‑government employees, whether covered or not. This limit was last enhanced from ₹10 lakh to ₹20 lakh effective 29 March 2018, and as of 2026 there has been no further revision.

This article is for informational purposes only and does not constitute financial or tax advice. Tax rules may change; please consult a professional for personalised guidance.

Frequently Asked Questions

Can I get gratuity if I worked for less than 5 years?
Under the Payment of Gratuity Act, you are generally eligible only after completing 5 years of continuous service. However, this rule does not apply in case of death or disablement due to an accident or disease; the legal heirs or the employee are entitled to gratuity regardless of the service period.
Is the gratuity amount fully tax-free in 2026?
For employees covered under the Act, the least of the actual gratuity received, Rs. 20 lakh, or the eligible amount computed as per the formula is exempt from tax under Section 10(10) of the Income Tax Act. Any excess is taxable as salary income.
How is gratuity calculated for employees not covered under the Payment of Gratuity Act?
For employees not covered by the Act, gratuity may still be paid as per the employer’s policy. The tax-exempt amount is the least of actual gratuity, Rs. 20 lakh, or half a month’s average salary for each completed year of service based on the last 10 months’ average salary.
What happens to gratuity if an employee dies while in service?
In the event of an employee’s death, the employer must pay gratuity to the nominee or legal heir. The amount depends on the service length: less than 1 year – 2 times the salary, 1–5 years – 6 times, 5–11 years – 12 times, 11–20 years – 20 times, and more than 20 years – 30 times the monthly salary. The maximum is still capped at Rs. 20 lakh.
How do you treat a fractional year of service while calculating gratuity?
For gratuity computation, a year is counted as one full year if the employee has worked for more than 6 months in that particular year. If the service period in a year is 6 months or less, it is ignored. For example, 5 years and 7 months counts as 6 years.
Is gratuity applicable to contract employees and freelancers?
The Payment of Gratuity Act primarily covers employees working in an establishment with 10 or more employees. Contract workers on the payroll of a contractor may also be eligible if they meet the service condition. Freelancers and independent consultants are generally not covered as they are not employees in the traditional sense.
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