Who qualifies for gratuity
Gratuity is a lump sum an employer pays for continuous service, governed by the Payment of Gratuity Act, 1972. The Act applies to any establishment with 10 or more employees, and once it applies it continues to apply even if headcount later falls below 10.
The core requirement is five years of continuous service. There are two exceptions where the five-year rule is waived entirely: death and disablement. In those cases gratuity is payable regardless of how long the employee served.
The rounding rule
Service is counted in whole years, and a part-year of six months or more rounds up. So 10 years 7 months counts as 11 years, while 10 years 5 months counts as 10. This single rule can be worth a full year of gratuity, which is why resignation timing matters.
The gratuity formula
For employers covered by the Act
- Salary
- Last drawn basic pay + dearness allowance, monthly
- 15
- Fifteen days of wages for each completed year
- 26
- Working days in a month, excluding Sundays
For employers not covered by the Act
The difference is the divisor. Covered employers use 26 because the Act treats a month as 26 working days; uncovered employers use the full 30-day month, which produces a lower figure. On the same salary and service, the uncovered formula pays about 13% less.
A worked example
Entirely tax-free, being well under the ₹20,00,000 exemption limit. The same service under an uncovered employer would pay ₹2,50,000.
Tax treatment
Gratuity is exempt from income tax up to a ceiling, under Section 10(10) of the Income Tax Act. Anything above the ceiling is added to salary income and taxed at your slab rate.
| Category | Exempt limit |
|---|---|
| Government employees | Fully exempt, no limit |
| Private employees covered by the Act | Least of: ₹20,00,000, actual received, or the formula amount |
| Private employees not covered | Least of: ₹20,00,000, actual received, or half a month's average salary per completed year |
The ₹20,00,000 limit is a lifetime cap across all employers, not per job. If you received ₹8,00,000 of exempt gratuity from a previous employer, only ₹12,00,000 remains exempt for the rest of your career.
When it must be paid
The employer must pay within 30 days of gratuity becoming due. Beyond that, simple interest is payable for the delay. Gratuity can be forfeited only where services were terminated for wilful damage, disorderly conduct, or an offence involving moral turpitude committed in the course of employment.
Frequently asked questions
How is gratuity calculated in India?
For employers covered by the Act: (last drawn basic + DA) × 15 × years of service ÷ 26. For employers not covered, the divisor is 30 instead of 26.
Only basic pay and dearness allowance count. HRA, bonuses and other allowances are excluded.
Do I get gratuity if I leave before 5 years?
Generally no. Five years of continuous service is the eligibility threshold, waived only in cases of death or disablement.
Some High Courts have held that 4 years and 240 days of service in the fifth year qualifies, but this is not applied uniformly and depends on jurisdiction.
Is gratuity taxable?
It is exempt up to ₹20,00,000 for private-sector employees, under Section 10(10). Government employees receive it fully tax-free.
The ₹20 lakh limit is a lifetime cap across all employers, not a per-job allowance.
Does 10 years and 7 months count as 11 years?
Yes. A part-year of six months or more rounds up to a full year. So 10 years 7 months counts as 11, adding roughly ₹28,846 on a ₹50,000 salary.
10 years 5 months counts as 10. Resigning a month or two later can be worth a meaningful sum.
What counts as salary for gratuity?
Last drawn basic pay plus dearness allowance only. HRA, conveyance, special allowances, bonuses and overtime are all excluded.
For employees on piece rates, the average of the last three months is used instead.