How to Calculate Gratuity in India 2026 — Formula, Eligibility & Tax Rules

Gratuity eligibility in India: The Payment of Gratuity Act 1972 covers all employees in establishments with 10 or more workers. Eligibility condition: continuous service of 5 years with the same employer. Exceptions to the 5-year rule: (1) Death of employee: gratuity paid to nominee regardless of tenure. (2) Disability due to accident or disease: gratuity payable without 5-year requirement. 4 years 240 days counts: Supreme Court ruling and many high courts have held that 4 years and 240 days (for employees working 6 days/week) constitutes completion of 5 years for gratuity purposes. This is important — employees who serve 4 years and approximately 8 months should not assume they are ineligible. Contract employees: if absorbed into the company, the contract period typically does not count. But some companies credit contract period — check appointment letter. Freelancers and gig workers: not covered under the Act unless specifically employed as per the definition. Central government employees: covered under CCS (Pension) Rules — service gratuity under different rules applies. Retirement age: gratuity payable on superannuation, resignation (with 5 years), retrenchment, disablement.

Gratuity calculation formula India: For employees covered under the Payment of Gratuity Act: Gratuity = (Last drawn salary x 15 x years of service) / 26. Where: Last drawn salary = Basic pay + Dearness Allowance (DA). 15 = days equivalent (half month per year of service). 26 = working days in a month (statutory). Years of service: rounded to nearest half year for 6 months or more. For employees NOT covered under the Act (small establishments or those above the threshold in some cases): Gratuity = (Last drawn salary x 15 x years of service) / 30. Example calculation: Employee with Rs45,000/month Basic+DA, 8 years 7 months service. Years = 9 (round up since 7 months > 6). Gratuity = (45,000 x 15 x 9) / 26 = Rs23.27L. Maximum statutory gratuity: Rs20L (increased from Rs10L in February 2019). If calculation exceeds Rs20L, employer pays Rs20L (unless company policy offers more — many PSUs pay actual calculated amount). Tax on gratuity: government employees — fully exempt. Non-government employees — exempt up to Rs20L under Section 10(10).

Gratuity tax treatment India: Government employees (central and state): fully exempt from income tax. No limit on exemption. Non-government employees (private sector, PSU not under government): Exempt under Section 10(10) up to the least of: (a) actual gratuity received, (b) Rs20L (current limit), (c) 15 days salary for each year of service (using 26-day month). Practical impact: for most employees whose gratuity is below Rs20L, entire gratuity is tax-free. If gratuity exceeds Rs20L: the excess is taxable as salary income in the year of receipt. Example: Employee receives Rs24L gratuity. Exempt: Rs20L. Taxable: Rs4L — added to other income and taxed at applicable slab rate. Received from multiple employers: the Rs20L exemption is lifetime cumulative — if you received Rs12L exempt gratuity from your previous employer, only Rs8L more is exempt in future. Keep records of gratuity received and exemption claimed. NPS/EPF coordination: gratuity and EPF are separate benefits — gratuity exemption does not reduce EPF or NPS exemption. Nomination: update gratuity nomination with HR whenever there is a life event change (marriage, birth of child). In case of death, nominee receives gratuity tax-free regardless of amount.

Employer refusal to pay gratuity — your rights: Employers CANNOT withhold or forfeit gratuity except in very specific cases. Lawful forfeiture situations: (a) Employee terminated for misconduct involving moral turpitude or criminal offence — gratuity can be forfeited. (b) Willful damage to employer property — gratuity can be forfeited to extent of damage. These are narrow exceptions. Unlawful withholding: not paying gratuity within 30 days of becoming payable is unlawful. The employer must pay simple interest from the due date. Complaint mechanism: file a complaint with the Controlling Authority (Labour Commissioner) in your jurisdiction. Process: submit a written complaint. Controlling Authority issues notice to employer. Hearing and order for payment. Further appeal to Appellate Authority if employer disputes. Timeline: most cases resolved within 6-12 months. Important: Form I must be submitted by employee to claim gratuity. Employee submits Form I to employer. Employer responds with Form L (acceptance) or Form M (rejection with reasons). Time limit for employer response: 15 days. Statute of limitations for complaint: 3 months from date of refusal (extendable if authority satisfied with cause of delay).

Gratuity maximum limit history India: The maximum gratuity limit has been revised periodically through amendments to the Payment of Gratuity Act: January 1997: limit raised from Rs1L to Rs2.5L. September 1997: raised to Rs3.5L. October 2010: raised to Rs10L. March 2018: Payment of Gratuity (Amendment) Act 2018 — limit raised to Rs20L (effective February 29, 2019). Current limit: Rs20L (as of 2026). This limit is for statutory exemption under the Act. Employers CAN pay more than Rs20L in gratuity (many large companies and PSUs do). The excess over Rs20L is taxable in the hands of the employee. Labour Code update: the new Labour Codes (not yet fully implemented as of June 2026) will bring gig workers and platform workers under social security including gratuity equivalents. Portability: current system ties gratuity to single employer tenure. The proposed social security code would create a portable gratuity fund — still pending implementation. What this means for you: if you have been with your employer for 10+ years on a salary of Rs50,000+ Basic+DA, check whether your accumulated gratuity entitlement has exceeded Rs20L — amounts above this will be taxable on exit.