Gratuity is a lump sum amount paid by an employer to an employee as a reward for long-term service. It is governed by the Payment of Gratuity Act, 1972 in India and becomes payable when an employee resigns, retires, is terminated, or in case of death or disability.
Employees should know how to calculate gratuity, the correct gratuity formula, and the tax exemption rules in India to understand their exact payout under the Payment of Gratuity Act, 1972.
Overview of Gratuity Calculation
| Factor | Details |
|---|---|
| Minimum Service | 5 years (not required in case of death/disability) |
| Formula | (Last Drawn Salary × 15 × Years of Service) ÷ 26 |
| Salary Considered | Basic Salary + Dearness Allowance (DA) |
| Service Calculation | More than 6 months = 1 year, Less than 6 months = ignored |
| Maximum Tax-Free Limit | ₹20 lakh (as per latest rules) |
| Applicable Law | Payment of Gratuity Act, 1972 |
Who is Eligible for Gratuity?
- Employees who have completed at least 5 years of continuous service with the same employer.
- The 5-year rule does not apply in case of death or permanent disability.
- It is payable on resignation, retirement, superannuation, termination, death or disability.
- Both government and private sector employees are eligible if covered under the Act.
Gratuity Calculation Formula
The standard formula under the Gratuity Act, 1972 is:
Gratuity = (Last Drawn Salary × 15 × Number of Completed Years of Service) ÷ 26
Where:
- Last Drawn Salary = Basic Salary + Dearness Allowance
- 15 = 15 days’ salary for each completed year of service
- 26 = Average working days in a month (as per Act)
- Years of Service = Only full years counted; more than 6 months is rounded up to 1 year
Examples of Gratuity Calculation
Case 1: 10 Years of Service
Last Drawn Salary (Basic + DA) = ₹40,000
Years of Service = 10Gratuity = (40,000 × 15 × 10) ÷ 26 = ₹2,30,769
Case 2: 15 Years 7 Months of Service
Last Drawn Salary (Basic + DA) = ₹50,000
Years of Service = 16 (7 months is rounded up)Gratuity = (50,000 × 15 × 16) ÷ 26 = ₹4,61,538
Case 3: 6 Years 4 Months of Service
Last Drawn Salary (Basic + DA) = ₹30,000
Years of Service = 6 (4 months not counted)Gratuity = (30,000 × 15 × 6) ÷ 26 = ₹1,03,846
Tax Rules on Gratuity
- Government employees: Entire gratuity is tax-free.
- Private sector employees (covered under the Act): Exempt up to ₹20 lakh. Any amount above this is taxable.
- Employees not covered under the Act: Exemption is limited to the least of:
- Actual gratuity received
- ₹20 lakh (overall exemption limit)
- Half month’s average salary × Completed years of service
Free Gratuity Calculator
Manual calculation can be confusing due to service rounding rules and tax exemptions. A Gratuity Calculator Tool helps by:
- Calculating gratuity instantly based on last drawn salary and years of service
- Applying the 6-month rounding rule automatically
- Showing the tax-free and taxable portions clearly
Try our Free Gratuity Calculator Tool to check your exact payout instantly.
Key Points to Remember while calculating Gratuity
- Minimum 5 years of service is required, except in case of death/disability.
- More than 6 months is rounded up; less than 6 months is ignored.
- Maximum tax-free gratuity limit is ₹20 lakh.
- Employers must pay gratuity within 30 days; delays require interest payment.
FAQs on Gratuity Calculation
Q1. How is gratuity calculated for private employees?
Gratuity is calculated using the formula: (Last Drawn Salary × 15 × Years of Service) ÷ 26.
Q2. Is gratuity taxable?
For government employees, gratuity is fully tax-free. For private employees, it is tax-free up to ₹20 lakh.
Q3. Can I get gratuity before 5 years of service?
No, except in cases of death or permanent disability.
Q4. What salary components are considered for gratuity?
Only Basic Salary and Dearness Allowance (DA) are included.
Q5. What is the maximum gratuity limit in India?
The maximum tax-free gratuity limit is ₹20 lakh as per current rules.
Q6. When should an employer pay gratuity?
Gratuity must be paid within 30 days of becoming due. Delay requires interest payment by the employer.
Gratuity is a valuable retirement benefit that ensures financial support after years of service. By understanding the formula and examples above, you can easily calculate your gratuity. For accurate results, use our Gratuity Calculator Tool to check your payout instantly.
Leave a Reply