Gratuity formula & eligibility

Gratuity is a lump-sum reward paid by an employer to an employee for long, continuous service. Under the Payment of Gratuity Act, 1972, you become eligible for gratuity after completing 5 years of continuous service with the same employer. It is paid on resignation, retirement or termination — and to nominees in case of death or disablement, where the 5-year condition may not apply.

The gratuity formula for employees covered by the Act is: gratuity = (15 × last drawn salary × years of service) ÷ 26, where salary means basic pay plus dearness allowance (DA). Any period of 6 months or more in the final year is rounded up to a full year. This gratuity calculator applies the formula and rounding automatically so you can estimate your payout in seconds.

Gratuity tax exemption (₹20 lakh)

Gratuity received by employees covered under the Payment of Gratuity Act is exempt from income tax up to a lifetime limit of ₹20 lakh. The actual exemption is the least of three amounts: the ₹20 lakh statutory ceiling, the gratuity actually received, or the amount computed by the 15/26 formula. Any gratuity above the exempt limit is taxable as salary income.

Because the exemption is a lifetime cap across all employers, employees who change jobs should track the cumulative exempt gratuity they have already claimed.

For CA firms

CA firms can use this gratuity calculator to compute provisions, advise clients on gratuity liability and verify the tax-exempt portion during salary and full-and-final settlement reviews. Hidesc helps practices manage payroll, statutory deadlines and client documents from a single dashboard.

Gratuity examples (Basic + DA, covered under the Act)