Gratuity Calculator

What is gratuity?

Gratuity is a lump-sum benefit paid by an employer to an employee in recognition of long-term service, typically at the time of retirement, resignation, or termination. It is one of the oldest employee benefit instruments in India, codified under the Payment of Gratuity Act 1972. Unlike provident fund contributions (which are accumulated from both employer and employee contributions), gratuity is funded entirely by the employer — no deduction is made from the employee's salary.

For many long-tenure employees — especially those with 15–25 years of service — gratuity can amount to several lakhs or even crores of rupees and represents a meaningful component of retirement income alongside EPF and pension.

The gratuity formula decoded

The statutory formula under the Payment of Gratuity Act is:

Breaking down the components:

• 15 represents 15 days of salary per completed year of service.
• Last drawn salary means only Basic Salary plus Dearness Allowance. HRA, transport allowance, special allowance, bonus, commission, and other perquisites are excluded.
• Years of service is rounded: if the fractional year has 6 or more months, it rounds up to the next whole year; if less than 6 months, it rounds down.
• 26 is the assumed number of working days in a month (30 days minus 4 Sundays).

So for an employee with 20 years of service and a last drawn Basic + DA of ₹80,000: Gratuity = (15 × 80,000 × 20) ÷ 26 = ₹9,23,077.

Applicability of the Payment of Gratuity Act

The Payment of Gratuity Act 1972 applies to:

• Every factory, mine, oilfield, plantation, port, and railway company.
• Every shop or establishment employing 10 or more persons on any day of the preceding 12 months.
• Any other establishment notified by the Central Government.

Once an establishment comes under the Act, it continues to be covered even if the headcount subsequently falls below 10. Employers not covered by the Act may still pay gratuity voluntarily or under contractual obligation; the tax exemption rules are slightly different for such cases.

Tax treatment of gratuity

Section 10(10) of the Income Tax Act provides the tax exemption framework:

• Government employees (central government, state government, defence, local authority): Entire gratuity is exempt — no monetary ceiling.
• Employees covered under the Payment of Gratuity Act: Exempt up to ₹20 lakh. Gratuity received beyond this is taxable as salary income in the year of receipt.
• Other employees (those not covered by the Act): Exemption is the least of: actual gratuity received, ₹20 lakh, or half-month's average salary (average of last 10 months) per completed year of service.

The ₹20 lakh ceiling applies to the total gratuity received from all employers during a lifetime, not per employer. If you received ₹12 lakh in gratuity from a previous employer and ₹15 lakh from the current employer, only ₹8 lakh of the current gratuity is exempt (making total exempt ₹20 lakh); the remaining ₹7 lakh is taxable.

Gratuity and resignation vs. retirement

Gratuity is payable on: retirement, resignation after 5 years, death, disability, and retrenchment. When an employee resigns before completing 5 years of continuous service, no gratuity is payable under the Act (though the employer may have a voluntary scheme). The 5-year rule is waived for death and disability — in those cases, gratuity is calculated on actual service tenure, however short.

Continuous service has a specific legal definition. It is not broken by absence due to sickness, accident, leave sanctioned by the employer, temporary layoff, strike, or lock-out. However, service terminated due to wilful misconduct may result in forfeiture of gratuity in some circumstances.

Gratuity funding: AS 15 and accounting

For corporate investors evaluating company financials, gratuity liability is relevant under Accounting Standard 15 (AS 15) or Ind AS 19, which requires companies to recognise the present value of the defined benefit obligation (the discounted future gratuity payouts). Companies typically fund this through a group gratuity scheme with a life insurance company (LIC or private insurers). The unfunded or underfunded portion appears as a liability on the balance sheet. In labour-intensive sectors like IT services, hospitality, and manufacturing with large workforces and long average tenure, gratuity liability can be material and worth examining in annual reports.

This page is educational only and does not constitute legal, HR, or tax advice. Gratuity calculations depend on the specific terms of employment, applicable legislation, and individual circumstances. For precise entitlement calculation and legal compliance, consult your employer's HR department, a qualified labour law advocate, or a SEBI-registered financial adviser.