Gratuity — Calculation, Eligibility & Tax Rules

📊Gratuity Calculation — With Examples

Formula: Gratuity = (Last drawn basic salary + DA) × 15/26 × Years of service.

Example 1: Basic + DA = ₹50,000/month. Service = 10 years. Gratuity = 50,000 × 15/26 × 10 = ₹2,88,462.

Example 2: Basic + DA = ₹80,000/month. Service = 20 years. Gratuity = 80,000 × 15/26 × 20 = ₹9,23,077.

Example 3: Basic + DA = ₹1,00,000/month. Service = 30 years. Gratuity = 1,00,000 × 15/26 × 30 = ₹17,30,769.

Why 26? The formula uses 26 working days in a month (not 30). Why 15? Gratuity is calculated at 15 days' salary per year — this was fixed by the Payment of Gratuity Act 1972.

Important: The current tax-free limit is ₹25 lakh (increased from ₹20 lakh in Budget 2024). Gratuity above ₹25 lakh is taxable at your income tax slab rate.

📋Eligibility Rules

Minimum 5 years of continuous service is required. However, the Supreme Court has ruled that 4 years and 240 days (or 4 years and 190 days for seasonal establishments) counts as 5 years for gratuity purposes.

Gratuity is payable on: (1) Retirement/superannuation, (2) Resignation after 5 years, (3) Death or disability (5-year rule waived — even 1 day of service qualifies), (4) Retrenchment/layoff after 5 years.

The employer MUST pay gratuity within 30 days of it becoming due. If delayed, the employer must pay simple interest for the delay period. Employees can file complaints with the Controlling Authority (Labour Commissioner) if gratuity is not paid.

Applies to: All establishments with 10+ employees (factory, mine, oilfield, plantation, port, railway, shop, or educational institution). Once the Act applies to an establishment, it continues to apply even if the number falls below 10.