Gratuity Calculator: Eligibility, Formula & Taxation
15 Days’ Salary Per Year — But Not the Way You Think
Gratuity sounds simple: 15 days of your last drawn salary for every completed year of service. But there’s a catch that trips up most people — the divisor is 26, not 30. The Payment of Gratuity Act, 1972 calculates "15 days" using a 26-day working month, which means you actually get slightly more than half a month’s salary per year.
The Gratuity Formula
Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 26
Where "Last Drawn Salary" = Basic Pay + Dearness Allowance (DA). Special allowances, HRA, and bonuses are excluded.
Who Is Eligible?
- Minimum 5 years of continuous service with the same employer (4 years 240 days may count in some cases)
- Applies to companies with 10 or more employees under the Gratuity Act
- Payable on resignation, retirement, death, or disability
- Death or disability cases: no minimum service period required
Worked Example: ₹50,000 Basic Salary, 8 Years Service
Rahul’s last drawn Basic + DA = ₹50,000/month. He’s completing 8 years at his company.
Gratuity = (50,000 × 15 × 8) ÷ 26 = ₹2,30,769
For 15 years of service at the same salary: (50,000 × 15 × 15) ÷ 26 = ₹4,32,692
Taxation of Gratuity
Gratuity received is exempt from tax up to a limit, but the rules differ based on your employment type:
| Category | Tax Exemption Limit |
|---|---|
| Government employees | Fully exempt |
| Employees covered under Gratuity Act | ₹20 lakh (as per current rules) |
| Employees NOT covered under Gratuity Act | ₹10 lakh |
The exemption is the lowest of: (a) gratuity actually received, (b) ₹20 lakh limit, or (c) 15/26 × last salary × service years. Any amount exceeding the exemption limit is added to your taxable income for that year.
Gratuity vs Other Exit Benefits
- Gratuity vs PF: PF is contributed monthly by you and employer; gratuity is a lump-sum from employer only. You can withdraw your EPF balance separately.
- Gratuity vs Leave Encashment: These are separate benefits. Leave encashment depends on your unused leave balance; gratuity depends on tenure.
- Gratuity vs Severance: Gratuity is a legal right under the Act; severance packages are discretionary.
Common Gratuity Mistakes
- Including HRA or special allowance in calculation: Only Basic + DA counts
- Rounding service years down: 7 years 11 months should round to 8 years if you’ve completed more than 6 months in the last year
- Forgetting tax on excess: If you receive more than ₹20 lakh, the excess is taxable
- Missing the 5-year threshold: Leaving at 4.5 years means zero gratuity (except in case of death/disability)