Gratuity Calculator

Understanding Gratuity: A Key Financial Milestone for Employees

Gratuity is a statutory monetary benefit provided by an employer to an employee in recognition of their long-term service to the organization. Governed by the Payment of Gratuity Act, 1972 in India, it serves as a crucial component of an employee’s retirement or separation package, acting as a token of gratitude for their loyalty and contribution. [2, 3] This lump-sum payment is a right, not a bonus, for employees who meet the specified eligibility criteria. [5]

For millions of employees across India, the gratuity amount represents a significant financial cushion that can be used to fund retirement, manage expenses during a job transition, or achieve long-term financial goals. However, the calculation itself can seem complex, involving factors like your last drawn salary, years of service, and specific legal formulas. This is precisely why a reliable Gratuity Calculator is so valuable. It demystifies the process, providing a clear and accurate estimate of what you are entitled to, thereby enabling better financial planning and ensuring you receive your rightful dues upon leaving an organization. [4]

Deconstructing the Gratuity Formula: A Step-by-Step Guide

The official formula for calculating gratuity under the Act might look simple, but each component has a specific meaning. Our Gratuity Calculator automates this, but understanding the parts empowers you to verify the amount.

The Core Formula: Gratuity = (Last Drawn Salary) × 15/26 × (Number of Years of Service) [6]

1. Last Drawn Salary (Basic + DA)

This is the most crucial input. The “salary” for gratuity calculation is not your total in-hand salary. It specifically includes only your Basic Salary and any Dearness Allowance (DA). [4, 6] Other components like House Rent Allowance (HRA), special allowances, or bonuses are excluded. The figure used is your last drawn salary before leaving the organization.

2. The “15/26” Factor

This fraction represents 15 days’ wages for every year of service. But why is it divided by 26 and not 30? The law considers 26 as the average number of working days in a month (30 days minus the 4 weekly off days). Therefore, (Last Drawn Salary / 26) calculates your daily wage, and multiplying it by 15 gives you 15 days’ wages. [7]

3. Number of Years of Service

This is the total period of continuous employment with a single employer. The rules for counting years are specific:

• Eligibility: You must complete a minimum of 5 years of continuous service to be eligible. [1, 5] The 5-year mark is technically considered complete after 4 years and 240 days of service (or 190 days for certain establishments like mines). [8]
• Rounding Off: For the calculation itself, any fraction of a year is rounded off. If you have worked for additional months beyond your completed years, a period of 6 months or more is rounded up to the next full year. A period of less than 6 months is ignored for the calculation. [4, 7] For example, 7 years and 7 months of service is counted as 8 years, while 7 years and 5 months is counted as 7 years.

Gratuity Eligibility: Who Qualifies and When?

Understanding the eligibility criteria for gratuity is just as important as knowing how to calculate it. The Payment of Gratuity Act, 1972, sets clear guidelines for when an employee becomes entitled to this benefit.

The 5-Year Service Rule

The primary condition for gratuity eligibility is the completion of five years of continuous service with the same employer. [1, 5] An employee who resigns or is laid off before completing this 5-year tenure is generally not eligible to receive a gratuity payout. [3]

What Constitutes “Continuous Service”?

Continuous service means uninterrupted employment. However, the Act allows for certain interruptions without breaking the continuity of service, such as:

• Sickness or accidents.
• Leave with full wages (e.g., earned leave, maternity leave).
• Layoffs, strikes, or lock-outs that are not the employee’s fault.

Exceptions to the 5-Year Rule

There is a very important exception to the 5-year service requirement. The minimum service period is waived if an employee’s service is terminated due to: [5, 8]

• Death: If an employee passes away while in service, their nominee is entitled to receive the gratuity, regardless of the length of service.
• Disablement: If an employee becomes disabled due to an accident or disease which renders them unable to perform their job, they are eligible for gratuity, even if they have not completed five years.

Gratuity Taxation and Maximum Limits

Understanding the tax implications of your gratuity is crucial. The tax treatment varies significantly between government and private sector employees. Our Gratuity Calculator automatically displays the correct tax-exempt amount for you.

• For Government Employees: Gratuity received by any central government, state government, or local authority employee is completely exempt from income tax. There is no upper limit. [1]
• For Private Sector Employees: For employees covered under the Payment of Gratuity Act, the tax exemption is on the *least* of the following three amounts:
  1. The actual gratuity amount received.
  2. The statutory limit of ₹20,00,000 (20 Lakhs). [1, 3]
  3. The gratuity calculated using the official formula: (Last Basic + DA) × 15/26 × Years of Service.
• Any amount received over this tax-exempt limit is added to your income and taxed as per your applicable income tax slab. [3]