Minimum 5 years required for gratuity eligibility.
What is Gratuity?
Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for long and continuous service. Under the Payment of Gratuity Act, 1972, employees who have completed five or more years of continuous service are entitled to gratuity upon retirement, resignation, or death. The formula is Gratuity = (15 × Last Drawn Monthly Salary × Years of Service) / 26, where 26 represents the number of working days in a month.
Gratuity received from an employer covered under the Gratuity Act is tax-exempt up to ₹20 lakh under Section 10(10) of the Income Tax Act. Any amount above this limit is added to your income and taxed at the applicable slab rate. The "last drawn salary" for this formula includes Basic pay and Dearness Allowance (DA) only — other allowances such as HRA or conveyance are excluded.
Partial years of service are generally rounded to the nearest half year. For example, 10 years and 7 months rounds to 11 years, while 10 years and 4 months rounds to 10 years. Employers in certain sectors may calculate gratuity differently, so always verify with your HR department for the exact amount.
Worked Example: 12 Years 7 Months of Service
Consider an employee whose last drawn Basic + DA is ₹60,000/month, with 12 years and 7 months of continuous service. Since the completed service period is more than 6 months past the last full year, it is rounded up to 13 years for the purpose of the calculation.
Applying the formula: Gratuity = (15 × 60,000 × 13) / 26 = ₹4,50,000. Since this amount is well below the ₹20 lakh exemption ceiling under Section 10(10), the entire ₹4,50,000 is fully tax-free— no portion of it is added to the employee's taxable income for the year.
| Last drawn salary (Basic + DA) | ₹60,000 |
| Service period (rounded) | 13 years |
| Gratuity payable | ₹4,50,000 |
| Taxable portion | ₹0 (fully exempt) |
Government vs Private Sector, and Death or Disability Cases
Central and state government employees typically receive gratuity under separate pension rules rather than the Payment of Gratuity Act, and their gratuity is fully tax-exempt regardless of amount. Private-sector employees, by contrast, fall under the Act (for organisations with 10+ employees) and are subject to the ₹20 lakh exemption ceiling described above — any gratuity above that limit is added to taxable salary income.
The 5-year minimum service rule has one key exception: if an employee dies or becomes permanently disabled while in service, gratuity is payable in full regardless of how long they have worked — even if service is just a few months. In such cases, the amount is paid to the employee's nominee or, if no nomination was filed, to their legal heir.
Gratuity vs EPF vs NPS
Gratuity is often confused with EPF and NPS, but the funding structure is completely different. Gratuity is entirely employer-funded — the employee never contributes a rupee toward it, and it is not deducted from salary. EPF and NPS, on the other hand, are contributory retirement schemes: both the employee and employer contribute a percentage of Basic + DA every month, and the accumulated corpus (with interest or market-linked returns) belongs to the employee from day one.
Because gratuity has no ongoing contribution, it builds no visible balance during employment — it is calculated only at the time of exit, using the formula above. If you want to see how your own retirement corpus grows through monthly contributions instead, try the EPF Calculator.
Frequently Asked Questions
What is the minimum service required to receive gratuity?
An employee must complete a minimum of 5 years of continuous service with the same employer to be eligible for gratuity under the Payment of Gratuity Act, 1972. However, in the case of death or disability, gratuity is payable regardless of service tenure.
How is gratuity calculated?
Gratuity = (15 × Last Drawn Monthly Salary × Years of Service) / 26. The 'last drawn salary' includes only Basic pay and Dearness Allowance (DA). The factor 15 represents 15 days of salary per completed year, and 26 is the number of working days in a month.
What is the maximum tax-free gratuity amount?
Gratuity received from an employer covered under the Gratuity Act is tax-exempt up to ₹20 lakh under Section 10(10) of the Income Tax Act. Any gratuity above ₹20 lakh is treated as taxable income for the year it is received.
When is gratuity paid?
Gratuity is payable when an employee leaves the organisation after completing 5+ years of service — due to resignation, retirement, superannuation, death, or disablement. The employer must pay gratuity within 30 days of it becoming due.
Does gratuity calculation differ for non-covered employees?
For employees not covered under the Payment of Gratuity Act (typically establishments with fewer than 10 employees), the formula is: Gratuity = (Half month's salary × Years of service), where half month's salary = (Basic + DA) × 15/30. Many employers still use the standard Act formula for uniformity.
Related Calculators
This calculator provides estimates based on the standard Payment of Gratuity Act formula. Actual gratuity may vary based on your employer's policy, sector-specific rules, or collective bargaining agreements. Consult your HR or a tax adviser for precise figures.