Gratuity is one of the most misunderstood parts of an Indian salary. It sits in your CTC for years, but you only receive it when you leave — and only if you have stayed long enough. This guide explains who is eligible, the exact formula, how much is tax-free, and what happens if you switch jobs early.
What is gratuity?
Gratuity is a lump-sum payment your employer makes to thank you for long service, governed by the Payment of Gratuity Act, 1972. It applies to any establishment with 10 or more employees. The cost is built into your CTC (typically ~4.81% of basic salary), but it is paid out only on exit.
Who is eligible?
- You must complete at least 5 years of continuous service with the same employer.
- Gratuity is payable on resignation, retirement, or termination (not misconduct).
- The 5-year rule is waived if service ends due to death or disablement — the nominee/employee is paid regardless of tenure.
A common question: does 4 years and 240 days count as 5 years? Courts have held that 4 years + 240 days in the 5th year qualifies in many cases, because a "year" can be read as 240 working days. But this is employer-dependent — do not assume it.
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.
Worked example
- 1Last drawn basic + DA = ₹50,000/month
- 2Years of service = 7 years
- 3Gratuity = (15 × 50,000 × 7) ÷ 26
- 4= ₹2,01,923
For employees not covered by the Act, a slightly different formula applies (using 30 days instead of 26). Rather than compute by hand, run your numbers through the calculator.
Calculate your exact gratuity in seconds
Open the Gratuity CalculatorHow 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?
If you leave before completing 5 years (and it is not death/disablement), you forfeit gratuity for that employer. This is worth weighing when you are close to the milestone — sometimes staying a few extra months unlocks a meaningful lump sum. That said, a significantly better offer almost always outweighs one gratuity payout.
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Frequently asked questions
Is gratuity part of CTC?
Yes. Employers include a gratuity provision (about 4.81% of basic) in your CTC, but it is paid out only when you leave after completing 5 years of service.
Can I get gratuity before 5 years?
Generally no — 5 years of continuous service is required. The only exceptions are death or disablement, where gratuity is paid regardless of tenure. Some employers honour 4 years + 240 days as qualifying.
How much gratuity is tax-free in India?
For private employees covered by the Payment of Gratuity Act, gratuity is tax-exempt up to a lifetime limit of ₹20 lakh. Amounts above that are taxed as salary.