Gratuity is payable once you have completed five years of continuous service, and it is capped at ₹20,00,000. The formula is fifteen days’ wages for every completed year. For a monthly-rated employee, the Act says to divide the last drawn monthly wage by 26 and multiply by 15.
The five-year condition has one exception written into the law. It does not apply where employment ends because of death or disablement. In that case gratuity is payable whatever the length of service.
What are the gratuity rules?
| Rule or limit | Figure | Applies to | Statutory source |
|---|---|---|---|
| Qualifying service | Five years of continuous service | Superannuation, retirement or resignation | Payment of Gratuity Act 1972, s.4(1) |
| Exception to five years | Not required | Termination due to death or disablement | Payment of Gratuity Act 1972, s.4(1) proviso |
| Rate | 15 days’ wages per completed year | Every completed year, plus a part over six months | Payment of Gratuity Act 1972, s.4(2) |
| Monthly-rated calculation | Monthly wage ÷ 26 × 15 | Monthly-rated employees | Explanation to s.4(2) |
| Seasonal establishments | 7 days’ wages per season | Employees not employed all year | Second proviso to s.4(2) |
| Maximum payable | ₹20,00,000 | Employees covered by the Act | Notification S.O. 1420(E), 29 March 2018 |
| Income tax exemption | ₹20,00,000 | Employees not covered by the Act | Income-tax Act, s.10(10)(iii) |
How is gratuity calculated?
Take the last drawn monthly wage. Divide by 26. Multiply by 15. Multiply by the number of completed years.
A part-year counts as a full year once it passes six months. Seven years and seven months counts as eight. Seven years and five months counts as seven.
An illustration, using a round figure rather than a real salary. On a last drawn wage of ₹50,000 and ten completed years, the calculation is 50,000 ÷ 26 × 15 × 10. That comes to ₹2,88,461.54. Our gratuity calculator runs the same arithmetic for your own numbers.
What counts as wages?
This is where most people get a shock. Gratuity is calculated on the last drawn wage, which means basic pay plus dearness allowance. It is not calculated on your cost to company.
House rent allowance, conveyance, bonus, overtime and employer contributions are outside it. On a package where basic pay is a third of CTC, the gratuity is roughly a third of what people expect. Our page on CTC versus in-hand salary shows how the split usually falls, and the take-home salary calculator makes it concrete.
The Act also has its own rule for piece-rated employees. Daily wages are averaged over the three months before the employment ends, and overtime is excluded.
Is gratuity taxable?
Gratuity received under the Act is exempt up to the statutory ceiling. For employees not covered by the Act, the income tax exemption under section 10(10)(iii) was raised to ₹20,00,000. Anything above the applicable limit is taxable as salary.
The ₹20,00,000 ceiling under the Act itself came in through a government notification dated 29 March 2018, which lifted it from ₹10,00,000. Both changes took effect on that date.
The exemption limit is a lifetime one across employers, not one per job. If you have already used part of it on an earlier exit, only the balance is exempt on the next.
When must the employer pay?
Gratuity is payable on termination of employment, once the qualifying service is complete. On the death of an employee, it goes to the nominee, and if there is no nomination, to the heirs. Where an heir is a minor, the share is deposited with the controlling authority, which invests it until the minor comes of age.
File your nomination. It is the difference between a payment made and a payment argued over.
The uncomfortable part
Four years and eleven months gets you nothing under the Act. That is the plain reading of the five-year condition, and it is why the last few months of a fifth year are worth more than they look. If you are close, count the months before you resign.
Gratuity is also not a savings product. It is a statutory payment out of your employer’s pocket, and it arrives once, at the end. It should not carry any weight in a retirement plan you are building now. Plan the retirement corpus separately, and file your return on time in the year you receive it.
Frequently asked questions
Can I get gratuity before five years?
Only where employment ends because of death or disablement. The Act removes the five-year condition in those cases and in no others.
Is gratuity calculated on basic salary or CTC?
On the last drawn wage, meaning basic pay plus dearness allowance. Not on CTC, and not on gross salary.
What is the maximum gratuity payable?
₹20,00,000 under the Payment of Gratuity Act, since the notification of 29 March 2018. The income tax exemption for employees outside the Act is also ₹20,00,000.
Does four years and seven months count as five years?
No. The five-year condition applies to continuous service, not to rounding. The six-month rounding rule applies to years after the fifth, when calculating the amount.
Why is 26 used in the formula?
Because the Act says so. The Explanation to section 4(2) directs that fifteen days’ wages be found by dividing the monthly wage by 26 and multiplying by 15. It treats a month as 26 working days.
Sources
- Chief Labour Commissioner, The Payment of Gratuity Act, 1972, section 4. https://clc.gov.in/clc/sites/default/files/PaymentofGratuityAct.pdf
- Press Information Bureau, Income tax exemption for gratuity enhanced up to Rs. 20 lakhs — confirms the ceiling raised from ₹10 lakh to ₹20 lakh by notification dated 29 March 2018, and the section 10(10)(iii) exemption. https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=189273
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