What this tool does
Gratuity is a statutory payment made by an employer to an employee completing five years of service, on resignation, termination, retirement or death. The amount is not discretionary and it is not a percentage of your final salary: it is fifteen days' wages for every completed year, taken out of the wages for twenty-six working days in a month. This calculator applies that formula, applies the five-year eligibility test first, and shows the tax treatment.
How it works
Eligibility comes before arithmetic. Section 4(1) of the Payment of Gratuity Act, 1972 makes gratuity payable only after five years of continuous service, and the tool applies that test before computing anything. Below five years the answer is zero, not a reduced amount, whether the employee resigned, was dismissed or reached superannuation. The five years is also the condition for the tax exemption, so a shorter tenure gives neither a payment nor a relief.
The formula is one line: 15/26 multiplied by the last drawn basic, multiplied by the period of service in years. The 15/26 fraction is the Act's own way of expressing fifteen days' pay out of the wages for twenty-six working days in a month. Fractional years are not dropped: service is counted as completed years plus completed months divided by twelve, so someone leaving at ten years and three months is paid for 10.25 years, not for ten. Only completed months count, and days within an incomplete month are ignored.
Service beyond thirty years is handled by a separate rule. The 15/26 component stops accruing after thirty years, and each completed year past that point is paid at thirty months' last drawn wages under section 4(5), which is a far more generous rate. The cap therefore bites hardest on employees in the middle of their thirties, where a few extra years can add little, and it rewards those who stay into their fifties.
The wage figure has a statutory floor, and leave affects the service count. Under section 4(3), where wages are below 7,500 a week, roughly 1,732 a month, the calculation uses that notional wage instead, so a genuinely low-paid employee cannot be paid gratuity on almost nothing. Unavailed leave with pay is treated as service for this purpose, which often adds several months to the total. On tax, section 10(10) exempts gratuity received on retirement or on resignation after the five-year threshold, up to a ceiling of 20,00,000 for FY 2026-27, with four years of service counting as one for the sub-ceiling part. Any amount above the ceiling is taxable as other income in the year of receipt.
Worked example
Last drawn basic of 50,000 a month, 10 years and 3 months of service, no unavailed leave with pay.
- Service = 123 months = 10 years and 3 months, so 123 / 12 = 10.25 years
- Five-year eligibility test: 123 months is more than 60, so gratuity is payable
- Qualifying wages = 50,000, above the 7,500-per-week floor, so the actual wage is used
- Gratuity = 50,000 × 15/26 × 10.25
- 50,000 × 0.576923 = 28,846.15; 28,846.15 × 10.25 = 295,673.08
- The section 10(10) ceiling is 20,00,000, so the whole 2,95,673 is exempt
Gratuity payable is approximately 295,673, fully exempt from income tax. The same employee at 48 months, that is four years, gets nothing at all, because five years is a threshold rather than a pro-rata point.
Accuracy and limitations
- The formula, the eligibility test and the exemption are stated as at the Payment of Gratuity Act, 1972 and section 10(10) for financial year 2026-27. Confirm the current-year position on incometaxindia.gov.in or with a chartered accountant before treating any figure as final.
- This is the statutory minimum, not necessarily what the employer will pay. Most employers settle a round number of days of last month's basic for each completed year, and many will pay a lesser figure agreed with the employee before the five-year point even arises.
- Notional pay, the value of board and lodging, and any gratuity provided under an award, contract or trust are not added here. Public sector employees are governed by different rules and awards rather than the Act alone.
Frequently asked questions
- How is gratuity calculated?
- Multiply the last drawn basic by 15/26, then by the period of service in years. The 15/26 fraction is fifteen days' wages out of twenty-six working days in a month, which is how the Act expresses the entitlement. Fractional years count as completed years plus completed months divided by twelve.
- Is gratuity payable before five years of service?
- No. Section 4(1) of the Payment of Gratuity Act, 1972 sets five years of continuous service as the threshold, so below it the payable amount is zero rather than a reduced figure. This applies whether the employee resigned, was dismissed, retired or died.
- Is gratuity taxable in India?
- Yes and no. Gratuity received on retirement, or on resignation after the five-year threshold, is exempt under section 10(10) up to 20,00,000 for FY 2026-27, with four years counting as one for the sub-ceiling portion. Anything above that ceiling is taxable as other income in the year it is received.
- Which basic salary is used in the calculation?
- The last drawn basic, including dearness allowance where it forms part of basic under the rules for that category of employee. It is not the average of the last few years and not the last-but-one month. A pay rise applied in your final month therefore does move the figure, which is a detail many employers and calculators get wrong.
- What happens after thirty years of service?
- The 15/26 component stops accruing after thirty years. Each completed year beyond thirty is paid at thirty months' last drawn wages, which is a much higher rate, so long-serving employees are not penalised by the cap. The tool applies both parts together and shows the capped years explicitly.
- Does unavailed earned leave count towards gratuity?
- Yes. Leave with pay that was not availed is treated as service for gratuity purposes, and employers add those months to the total before applying the formula. It frequently adds several months of service and therefore a visible amount, particularly for someone leaving after a long career without taking their annual leave.