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If you work in India, your employer owes you a lump-sum payment called gratuity when you leave after long service. It is not a bonus or a favour — it is a legal entitlement under the Payment of Gratuity Act, 1972. The amount follows a fixed formula based on your last drawn salary and your years of service, so you can work out exactly what you should receive before you sign your full and final settlement.
The gratuity formula
Gratuity is calculated on your last drawn salary — your basic pay plus dearness allowance (DA) — not your total CTC. The formula is:
Gratuity = (Last drawn basic + DA) × 15 × years of service ÷ 26
The 15 stands for 15 days' wages for each completed year of service. The 26 is the number of working days assumed in a month (a 30-day month minus four Sundays). Put together, the formula pays you roughly half a month's salary for every year you worked.
Worked example
Take an employee whose last drawn basic salary is ₹50,000 a month (with no DA) and who completes 10 years of service. Gratuity = 50,000 × 15 × 10 ÷ 26 = ₹2,88,462. Run the same numbers through the formula above to check your own figure — and remember, the salary in the formula is your last drawn basic, not the salary you started on.
Who qualifies for gratuity?
You qualify once you complete five continuous years of service with the same employer. It does not matter how the job ends — resignation, retirement or termination all qualify once the five years are done. Less than five years means no gratuity, with one important exception: if an employee dies or becomes permanently disabled, gratuity is paid no matter how short the service. Also note the rounding rule: once you are past five years, a part-year of more than six months counts as a full year — seven years and seven months is paid as eight years.
Basic salary matters more than your CTC
This is the detail that costs people lakhs: only basic pay and dearness allowance feed into the formula. HRA, special allowances, bonuses and overtime are excluded. If your offer letter shows a low basic with most pay labelled as allowances, your gratuity shrinks. When negotiating an offer in India, push for a higher basic component — it directly raises your end-of-service payout and your EPF contributions too.
The ₹20 lakh cap
No matter how long you serve or how high your salary, the gratuity payable under the Act cannot exceed ₹20,00,000 (twenty lakh rupees). The cap was raised to this level by the 2018 amendment. An employer may pay more voluntarily, but the Act does not require it.
Is gratuity taxable?
Gratuity received under the Act is exempt from income tax up to ₹20 lakh under Section 10(10) of the Income Tax Act — the exempt amount is the least of the actual gratuity received, the ₹20 lakh ceiling, and the amount the formula gives. Anything above that is taxed as salary income. Government employees get full exemption. Tax rules change, so check current rates if your payout is large.
When do you get paid?
Your employer must pay gratuity within 30 days of it becoming due. If payment is delayed, the employer is liable to pay interest on the delayed amount. If your employer refuses or underpays, you can file a claim with the Controlling Authority under the Act in your state.
Not covered by the Act?
The Act applies to establishments with 10 or more employees. If your employer is not covered, gratuity is usually still paid under company policy — but the formula changes: the month is counted as 30 days instead of 26, so gratuity = (last drawn basic + DA) × 15 × years ÷ 30. Check your appointment letter or HR policy for the exact terms that apply to you.