How Gratuity Is Calculated in India and How Much Tax You Pay on It
Published 30 June 2026 · Tax & Salary
Sangeeta worked at the same manufacturing company in Pune for 10 years. She is now leaving for a better role. Her HR mentioned during the exit conversation that she would receive gratuity, and gave her a figure verbally — "around ₹2.5–3 lakh." Sangeeta wanted the exact number. The Payment of Gratuity Act formula gives it precisely, without any estimation.
The Gratuity Formula Under the Payment of Gratuity Act
For companies covered under the Payment of Gratuity Act 1972 (applies to all establishments with 10 or more employees):
Gratuity = (Last drawn Basic + DA) × 15 × Years of service / 26
The 15/26 represents 15 days of pay out of 26 working days per month. For companies not covered under the Act, the divisor changes to 30 instead of 26 — giving a lower gratuity.
Sangeeta's last drawn basic salary: ₹50,000/month. No separate Dearness Allowance (DA). Years of service: 10 (exact).
Gratuity = ₹50,000 × 15 × 10 / 26 = ₹75,00,000 / 26 = ₹2,88,462.
Gratuity Amounts by Basic Salary and Years of Service
| Basic Salary | 5 years | 10 years | 15 years | 20 years |
|---|---|---|---|---|
| ₹25,000 | ₹72,115 | ₹1,44,231 | ₹2,16,346 | ₹2,88,462 |
| ₹50,000 | ₹1,44,231 | ₹2,88,462 | ₹4,32,692 | ₹5,76,923 |
| ₹1,00,000 | ₹2,88,462 | ₹5,76,923 | ₹8,65,385 | ₹11,53,846 |
Formula confirmation: ₹25,000 × 15 × 5 / 26 = ₹18,75,000 / 26 = ₹72,115. ₹1,00,000 × 15 × 20 / 26 = ₹3,00,00,000 / 26 = ₹11,53,846.
Tax on Gratuity: Section 10(10) Exemption
Gratuity received from a private sector employer is tax-exempt up to ₹20,00,000 under Section 10(10). Sangeeta's ₹2,88,462 is entirely below this limit — fully tax-free. A senior executive with 25 years of service and ₹1,50,000 basic salary would receive approximately ₹8,65,385 in gratuity — still below ₹20L, fully exempt.
If gratuity exceeds ₹20L (which happens at very high basic salaries and long tenures), the amount above ₹20L is taxable as salary income in the year of receipt. Government employees receive full exemption with no upper limit.
The CTC Trap: Gratuity Is Not Monthly Income
Most companies include gratuity in their CTC as a notional cost. The standard formula: (basic × 15/26) / 12 = monthly gratuity accrual ≈ 4.81% of monthly basic. For Sangeeta at ₹50,000 basic: monthly gratuity accrual = ₹50,000 × 15/26 / 12 = ₹2,404/month. This ₹2,404 reduces her monthly take-home — it is an employer cost that accumulates toward the eventual payout.
The point is this: if your CTC shows gratuity as a line item, that amount was already subtracted from your monthly pay across the employment period. When you receive it, it is not a bonus on top of what you have earned — it is the deferred portion of your own compensation package being returned.
Run this for your own numbers
Calculate Your Gratuity →What Most People Get Wrong
They count gratuity in their CTC as accessible income. It is not — gratuity is locked until 5 years of continuous service with the same employer. An employee who resigns at 4 years and 11 months receives nothing under the Payment of Gratuity Act. Some courts have interpreted "5 years" as 4 years and 240 working days (which is effectively the 5th year substantially complete), but this is not uniformly applied across employers. Do not assume it applies to your situation without checking.
Frequently Asked Questions
How is gratuity calculated in India?
For companies under the Payment of Gratuity Act: Gratuity = (Last drawn basic + DA) × 15 / 26 × years of service. The 15/26 represents 15 days pay out of 26 working days per month. For companies not under the Act: (Last drawn basic + DA) × 15 / 30 × years of service.
What is the minimum service period to be eligible for gratuity?
Minimum 5 years of continuous service with the same employer (unless death or disability). The Payment of Gratuity Act 1972 applies to all companies with 10+ employees. Companies with fewer than 10 employees may have different rules.
Is gratuity taxable in India?
Gratuity is tax-exempt up to ₹20 lakh under Section 10(10) of the Income Tax Act. This limit was enhanced from ₹10L to ₹20L. For government employees, gratuity is fully exempt. For private sector employees, gratuity above ₹20L is taxable as salary income.
What happens to gratuity if I resign before 5 years?
You forfeit the gratuity entitlement under the Payment of Gratuity Act. However, some companies pay ex-gratia amounts voluntarily. Some courts have interpreted "5 years" as 4 years and 240 days (the 5th year being "substantially" completed) — but this is not uniformly applied.
Is gratuity included in CTC?
Yes — most companies include gratuity in CTC as a notional cost (typically 4.81% of basic salary). The formula: (basic × 15/26) / 12 × 12 = basic × 15/26 ≈ 4.81% of annual basic. If your CTC shows gratuity, it reduces your take-home and you only receive it upon meeting the 5-year service condition.
How many years have you been with your current employer — and have you verified that your gratuity calculation matches the Payment of Gratuity Act formula?