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Gratuity Rules in India: Eligibility, Formula, and Tax Exemptions

ConverterPilot Legal & Finance Desk May 22, 2026 6 min read

Gratuity is a monetary reward given by an employer to an employee for their long-term service to the organization. In India, this retirement benefit is governed by the Payment of Gratuity Act, 1972. Let's review the eligibility rules, calculations, and tax exemptions.

Gratuity Eligibility Criteria

To receive gratuity, an employee must satisfy the following conditions:

1. Employment Minimum: Must have completed at least five years of continuous service with the same employer.

2. Company Size: The company must employ at least 10 workers on any day in the preceding 12 months.

3. Exceptions to the 5-year Rule: The 5-year continuous employment condition is waived if the employee's service is terminated due to death, disablement due to accident, or serious illness.

The Mathematical Gratuity Formula

For employees covered under the Payment of Gratuity Act, the gratuity amount is calculated using the following formula:

Gratuity = (15 * Last Drawn Salary * Tenure) / 26

Where:

  • Last Drawn Salary: Consists of Basic Salary + Dearness Allowance (DA). Commissions, bonuses, and HRA are excluded.
  • Tenure: Years of service. A fraction of a year exceeding 6 months is rounded up to the next full year. For example, a tenure of 7 years and 7 months is counted as 8 years, whereas 7 years and 5 months is counted as 7 years.
  • 26: Represents the number of working days in a month.
  • 15: Represents 15 days of salary per year of completed service.

Worked Calculation Example

Suppose an employee is retiring after 12 years and 8 months of continuous service. Their last drawn monthly basic salary plus DA is ₹60,000.

1. Determine Rounded Tenure: 12 years and 8 months is rounded up to 13 years (since 8 months > 6 months).

2. Apply Formula: Gratuity = (15 * 60,000 * 13) / 26.

3. Multiply: 15 * 60,000 * 13 = 11,700,000.

4. Divide by 26: 11,700,000 / 26 = ₹4,50,000.

The gratuity payable is ₹4,50,000.

Income Tax Exemptions on Gratuity

  • Government Employees: Gratuity received by central, state, or local government employees is completely exempt from income tax.
  • Private Sector Employees: Private employees enjoy tax exemption on gratuity up to a maximum lifetime cap of ₹25 Lakhs (updated in recent budgets). Any gratuity received exceeding this limit is taxable based on the employee's income tax slab.