Gratuity calculation in India: formula, eligibility & rules
Gratuity rewards long service — but who qualifies, and how is it calculated? Here's the gratuity formula and eligibility, explained plainly.
Gratuity is a lump-sum reward employers pay employees for long, continuous service. It’s governed by the Payment of Gratuity Act, and both employers and employees benefit from understanding how it works.
Who is eligible for gratuity?
An employee generally qualifies for gratuity after completing five years of continuous service with the same employer. The five-year condition is waived in cases of death or disablement.
The gratuity formula
For employees covered by the Payment of Gratuity Act, gratuity is calculated as:
Gratuity = (Last drawn salary × 15 × years of service) ÷ 26
Where:
- Last drawn salary = basic pay + dearness allowance.
- 15 = 15 days of wages for each completed year.
- 26 = the number of working days assumed in a month.
An example
- Last drawn salary (basic + DA): ₹30,000
- Years of service: 8
- Gratuity = (30,000 × 15 × 8) ÷ 26 = ₹1,38,461
A period of more than six months in the final year is usually rounded up to a full year.
Important points
- Gratuity up to the prescribed limit is tax-exempt for employees.
- It’s paid at exit — resignation, retirement, or in the unfortunate cases covered above.
- It typically forms part of an employee’s full and final settlement.
Track service and salary automatically
Gratuity depends on accurate joining dates and salary history — data that’s easy to lose in spreadsheets. Staff Payroll keeps employee tenure and salary structures in one place, so eligibility and amounts are easy to compute when an employee exits.