Gratuity Rules in India: Eligibility, Calculation Formula & Tax Exemption Explained

Gratuity Rules in India: Eligibility, Calculation Formula & Tax Exemption Explained

Gratuity is one of the most important retirement and employee benefit components in India. It acts as a financial reward given by an employer to an employee for their long-term service to the organization. Many employees are unaware of how gratuity works, who is eligible, how it is calculated, and whether it is taxable or not.

In this detailed guide, you will learn everything about gratuity rules in India, including eligibility criteria, calculation formula, examples, tax exemption rules, and how to calculate gratuity online easily.

What is Gratuity?

Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for the services rendered during employment. It is governed by the Payment of Gratuity Act, 1972 and applies to factories, offices, shops, and establishments with a specified number of employees.

Gratuity is usually paid when an employee:

Retires

Resigns after long-term service

Becomes disabled due to illness or accident

Passes away (paid to nominee or legal heir)

Gratuity Rules in India

The Payment of Gratuity Act lays down clear rules regarding gratuity payment. Some key rules include:

The organization must have 10 or more employees for the Act to apply.

Gratuity becomes payable after completing a minimum period of service.

Gratuity amount depends on salary and years of service.

Employers are legally required to pay gratuity if eligibility conditions are met.

Who is Eligible for Gratuity?

An employee becomes eligible for gratuity if they satisfy the following conditions:

Completed at least 5 years of continuous service with the same employer

Applicable to both private and government employees

The 5-year rule is not mandatory in case of death or permanent disability

What Counts as Continuous Service?

Continuous service includes:

Paid leaves

Maternity leave

Layoff period

Absence due to illness or accident

Even if an employee works for 4 years and 240 days, it may be considered as 5 years under certain conditions.

Gratuity Calculation Formula

The gratuity amount is calculated using a standard formula prescribed by law.

Gratuity Formula (For Covered Employees)

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Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 26

Where:

Last Drawn Salary = Basic Salary + Dearness Allowance (DA)

15 = Number of days’ salary paid for each year

26 = Number of working days in a month

Years of Service = Rounded off to nearest full year

Example of Gratuity Calculation

Suppose:

Last drawn salary (Basic + DA) = ₹30,000

Years of service = 10 years

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Gratuity = (30,000 × 15 × 10) ÷ 26

Gratuity = ₹1,73,076

So, the employee will receive approximately ₹1.73 lakh as gratuity.

Calculate Gratuity Online (Recommended)

Manual calculation can sometimes be confusing and time-consuming.

👉 To calculate your exact gratuity amount instantly, based on salary and years of service, use our free Gratuity Calculator India.

Click here to calculate gratuity online easily.

This calculator follows the latest Indian gratuity rules and gives accurate results within seconds.

Gratuity Tax Exemption Rules in India

Gratuity taxation depends on the type of employee.

For Government Employees

Gratuity is fully tax-exempt

For Private Sector Employees Covered Under the Act

Tax exemption is the lowest of the following:

Actual gratuity received

₹20 lakh (maximum exemption limit)

Calculated gratuity as per formula

For Employees Not Covered Under the Act

Tax exemption is the lowest of:

Actual gratuity received

₹20 lakh

Half month’s average salary for each completed year

Any amount above the exemption limit becomes taxable under the Income Tax Act.

When is Gratuity Paid?

Gratuity is usually paid within 30 days from the date it becomes payable. If the employer delays payment without valid reason, they may have to pay interest on the gratuity amount.

Important FAQs on Gratuity

Is gratuity mandatory for employers?

Yes, if the organization is covered under the Payment of Gratuity Act.

Can an employee lose gratuity?

Yes, in cases of misconduct such as theft, fraud, or violence, gratuity may be forfeited partially or fully.

Is gratuity applicable on resignation?

Yes, provided the employee completes the required years of service.

Is gratuity part of CTC?

Some companies include gratuity in CTC, but actual payment is made only on eligibility.

Why Gratuity is Important for Employees

Acts as a retirement benefit

Encourages long-term employment

Provides financial support after leaving a job

Helps in future financial planning

Understanding gratuity rules helps employees make better career and financial decisions.

Conclusion

Gratuity is a valuable employee benefit that rewards long-term service and provides financial security after employment. Knowing the eligibility rules, calculation formula, and tax exemption limits can help you estimate your gratuity amount accurately.

If you are unsure about manual calculations, the easiest way is to use an online gratuity calculator to get instant and precise results. Always keep track of your salary structure and years of service to plan your finances better.

Disclaimer

This article is published for educational and informational purposes only. It does not provide legal, financial, or tax advice. Gratuity rules may change based on government regulations. Always consult official sources or a qualified professional for accurate guidance.