How to Calculate Gratuity in India: Formula and Examples

The standard gratuity calculation formula is: last drawn monthly wages × 15 ÷ 26 × years of service. Fifteen days' wages for every completed year, with a month treated as 26 working days. For someone leaving on ₹45,000 a month after 13 counted years, that's ₹45,000 × 15 ÷ 26 × 13 = ₹3,37,500.

Gratuity now comes under the Code on Social Security, 2020, which replaced the Payment of Gratuity Act, 1972 from 21 November 2025. Below: who is eligible, which wages to use, how to count service, the ₹20 lakh limit, tax, and two worked examples.

Who is eligible for gratuity

The law applies to establishments with 10 or more employees. Gratuity can be forfeited, wholly or partly, only for termination due to specified misconduct such as wilful damage or an offence involving moral turpitude.

• Employees who leave after five years of continuous service – on resignation, retirement, superannuation or termination.
• Fixed-term employees – on a pro-rata basis once they complete one year, under the Code on Social Security.
• Death or disablement – gratuity is payable to the nominee or the employee without the five-year condition.

Which wages to use

Use the last drawn monthly wages: basic pay plus dearness allowance (and retaining allowance, if any). Under the labour codes, if allowances excluded from wages – HRA, conveyance and the like – exceed 50% of total pay, the excess is added back. Salary structures with a very low basic now give a higher gratuity than before, which is worth checking when you design CTC.

How to count years of service

Count completed years, and round up a part year of more than six months to a full year. Twelve years and seven months counts as 13 years; twelve years and five months counts as 12. Use the dates of joining and leaving, and include periods of paid leave and lay-off as service.

Worked examples

1. Permanent employee: wages ₹45,000, service 12 years 7 months → 13 years. Gratuity = ₹45,000 × 15 ÷ 26 × 13 = ₹3,37,500.
2. Fixed-term employee: wages ₹28,000, contract of 1 year 9 months → 2 years. Gratuity = ₹28,000 × 15 ÷ 26 × 2 = ₹32,308.
3. Long-serving manager: wages ₹2,40,000, 30 years → ₹2,40,000 × 15 ÷ 26 × 30 = ₹41,53,846, capped at ₹20,00,000.

The ₹20 lakh limit and tax

The maximum gratuity payable under the law is ₹20 lakh. An employer can pay more under its own scheme, but the excess is ex-gratia.

For private-sector employees, gratuity received on retirement or leaving is tax-free up to the least of: the amount received, ₹20 lakh, and the formula amount (15/26 of last wages for each year). Anything above that is taxed as salary. Government employees' gratuity is fully exempt.

Paying gratuity on time

• Pay within 30 days of the date it becomes payable; delayed gratuity carries interest.
• Collect the nomination when the employee joins and update it on marriage.
• Include gratuity in the full and final settlement and show the working in the F&F statement.
• Provide for gratuity in the accounts every year – an actuarial valuation for companies following Ind AS or AS 15, or a simple formula-based estimate for small firms.

Calculate it in Excel

Our free Gratuity Calculator applies the eligibility rules, service rounding, the 50% wage rule, the ₹20 lakh cap and the tax exemption for one employee or a whole team, and shows the gratuity provision. When someone leaves, the Full & Final Settlement template brings gratuity, leave encashment and notice pay together. Payroll teams can get both in the HR & Payroll Kit.