Gratuity in India: Formula, Eligibility and Model Limits

A gratuity provision in CTC is not cash received each month. This guide explains the formula and historical framework behind the calculator, and which eligibility and tax details to verify before treating an estimate as an entitlement.

What is gratuity?

Gratuity is a service-linked payment, not monthly cash salary. This guide describes the Payment of Gratuity Act, 1972 framework behind the existing model, not verified current-year eligibility. An employer may include a gratuity provision in CTC; the salary calculator assumes 4.81% of basic, but that is not a universal payroll percentage or a confirmed entitlement.

Eligibility in the historical framework

• The existing calculator uses at least 5 years of continuous service with the same employer as its eligibility threshold.
• The historical Act framework covers qualifying cessation of service; any forfeiture has legal conditions and is not established merely by termination.
• Death and disablement are exceptions to the traditional five-year condition. The calculator does not assess exceptions or verify current rules for your employment category.

Questions about 4 years and 240 days, continuous service or fixed-term employment require the applicable law and facts to be checked. The calculator does not resolve these cases; do not assume its five-year threshold decides your legal eligibility.

The gratuity formula

Gratuity = (15 × last drawn salary × years of service) ÷ 26

Here, last drawn salary = basic salary + dearness allowance, "15" represents 15 days of wages per completed year, and "26" is the number of working days in a month. Service beyond 6 months in the final year is rounded up to a full year.

Inputs to check before estimating

1. Confirm the salary components that count as wages under the applicable rules.
2. Check continuous service and how any partial final year is treated.
3. Confirm that the formula and eligibility conditions apply to your employment.
4. Compare the estimate with the employer's calculation and applicable limits.

Different employment coverage can require different treatment. The calculator retains a simplified 15/26 formula, five-year eligibility threshold and ₹20 lakh cap; it does not assess all exceptions, partial-year rounding or current legal changes.

How much gratuity is tax-free?

For private-sector employees covered by the Act, gratuity is tax-exempt up to ₹20,00,000 (lifetime limit across all employers). The exempt amount is the lowest of: ₹20 lakh, the actual gratuity received, or the amount per the formula. Anything above ₹20 lakh is taxable as salary income. Government employees receive gratuity fully tax-free.

What if you switch jobs before 5 years?

Leaving before the model's five-year threshold can affect eligibility, but exceptions and applicable employment rules require separate review. If you are near a milestone, compare confirmed entitlements with the full terms of a new offer rather than assuming a job change always outweighs the benefit.

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