Gratuity is a lumpsum payment your employer owes you when you leave after at least five continuous years — but the formula, the ₹20-lakh tax-free cap, and the "continuous service" rule trip up most employees.
Eligibility
The Payment of Gratuity Act, 1972 covers any establishment with 10+ employees on any day in the preceding 12 months. To claim gratuity you need five years of continuous service (excludes career breaks beyond authorised leave). Death-in-service and permanent disability waive the 5-year minimum.
The formula
For employees covered under the Act: Gratuity = (Last drawn Basic + DA) × 15 × Years of service / 26. Twenty-six because gratuity counts only working days in a month. For not-covered establishments (rare), the divisor is 30 days.
Years are rounded: any portion over 6 months counts as a full year (so 5 years 7 months = 6 years), but only after the initial 5-year threshold is met.
Tax treatment
For non-government employees, gratuity up to ₹20 lakh is fully tax-free. Anything above that is added to your salary income and taxed at slab rate. Government employees enjoy full tax exemption regardless of amount.
Three common mistakes
First, employees ignore Basic + DA composition — companies that load CTC into HRA and allowances rather than Basic end up paying lower gratuity. Second, "continuous service" is often misunderstood; sabbaticals and approved leave count, voluntary breaks don't. Third, gratuity is automatic — you don't apply, the employer must pay within 30 days of separation or face 8% annual interest.
Crunch your own number in our Gratuity calculator.