How gratuity is calculated in India

Gratuity is a lump sum an employer pays you for long service, governed by the Payment of Gratuity Act, 1972. You become eligible after 5 years of continuous service (waived on death or disablement). The calculator above shows what you are owed and the tax-free ceiling.

The formula

Here last drawn salary is basic pay plus dearness allowance (DA). For Act-covered employees, service of more than 6 months in the final year rounds up to a full year. The maximum tax-free gratuity is ₹20 lakh.

A worked example

Salary (basic + DA) ₹40,000, service 11 years, Act-covered: Gratuity = (15 × 40,000 × 11) / 26 = about ₹2,53,846, fully tax-free as it is under ₹20 lakh.

How gratuity is taxed

For private employees, the exemption is the least of the actual gratuity, ₹20 lakh, or the formula amount. Government employees' gratuity is fully exempt.

Claiming it

• Apply using Form I within 30 days of it becoming payable.
• The employer must pay within 30 days, with interest if delayed.
• File a nomination (Form F) during service so it reaches your nominee smoothly.

The 4-years-240-days rule

Many employees leave at 4 years and 7–11 months assuming they get nothing — but several High Courts have held that completing 4 years and 240 days in the fifth year counts as five years of continuous service for gratuity (190 days where the establishment works a 5-day week). If your tenure is just short of five years, it is worth checking your exact days of service before walking away from the claim, because the gratuity can run into lakhs.

Common mistakes that reduce your gratuity

The most frequent error is assuming gratuity is calculated on gross salary. It uses only basic + DA, so a "₹70,000 salary" with ₹30,000 basic uses ₹30,000 in the formula. The second mistake is confusing the company's voluntary ex-gratia with statutory gratuity — the formula amount is your legal minimum, and any ex-gratia is over and above it. Third, employees forget that the ₹20 lakh tax-free ceiling is a lifetime limit across all employers, not per job, so a second large gratuity later in your career may be partly taxable.

What if the employer refuses or delays?

Gratuity is a statutory right, not a goodwill payment. If an employer rejects a valid claim or delays beyond 30 days, you can approach the Controlling Authority (usually the Labour Commissioner's office) under the Act. The employer owes simple interest for any delay beyond 30 days. An employer can forfeit gratuity only in narrow cases — for example, where services were terminated for proven misconduct causing loss — and even then only to the extent of the loss.

Frequently asked questions

Source: Payment of Gratuity Act, 1972, and Income-Tax Act Section 10(10). Figures are indicative - confirm with your employer. ComplyKraft is independent; this is not professional advice.