Question 1

What is gratuity?

Accepted Answer

Gratuity is a statutory terminal benefit paid by an employer to an employee as a token of appreciation for long-term service. Since 21 November 2025 it is governed by the Code on Social Security, 2020, which replaced the Payment of Gratuity Act, 1972. It applies to factories, mines, oilfields, plantations, ports, railways, and shops/establishments with 10+ employees. Gratuity is payable on retirement, resignation, superannuation, death, or disablement after completing 5 years of continuous service (5-year rule waived for death/disability).

Question 2

How is gratuity calculated?

Accepted Answer

For employees covered by the gratuity law: Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 26. For employees NOT covered: Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 30. Last Drawn Salary = Basic + Dearness Allowance (DA). The divisor 26 represents working days in a month (excluding 4 Sundays). Service exceeding 6 months is rounded up to the next year.

Question 3

What is the 15/26 formula in gratuity?

Accepted Answer

The 15/26 formula means: 15 days' wages for every completed year of service, calculated on the basis of 26 working days per month (30 calendar days minus 4 Sundays). So for an employee with ₹50,000 Basic+DA and 10 years of service: Gratuity = (₹50,000 × 15 × 10) ÷ 26 = ₹2,88,462. The ÷26 applies to establishments covered under the Act; non-covered use ÷30.

Question 4

What is the minimum service required for gratuity?

Accepted Answer

The minimum continuous service required is 5 years with the same employer. However, this 5-year rule is waived in two cases: (1) Death — gratuity is payable to the nominee/legal heir regardless of service length. (2) Disability — if the employee becomes physically/mentally incapable due to accident or disease. The '4 years and 240 days' judicial interpretation: If you complete 240 days in the 5th year (6-day week) or 190 days (5-day week), you're deemed to have completed 5 years.

Question 5

Is gratuity taxable?

Accepted Answer

Tax treatment (formerly Section 10(10) of the Income-tax Act, 1961; the same limits continue under the Income-tax Act, 2025): Government employees — 100% tax-exempt with no limit. Private employees (covered under the Act) — exempt is the LEAST of: (a) Actual gratuity received, (b) ₹20 lakh (lifetime limit), (c) Formula amount (15/26 × Last Salary × Years). Private employees (not covered) — exempt is the LEAST of: (a) Actual gratuity, (b) ₹20 lakh, (c) Half-month's average salary (last 10 months) × years. Amount exceeding the exempt portion is taxable as 'Income from Salary'.

Question 6

What is the maximum gratuity amount?

Accepted Answer

There is NO statutory cap on the gratuity amount itself — the formula determines the actual amount. The ₹20 lakh limit is only for TAX EXEMPTION for private sector employees. Government employees received a ceiling increase to ₹25 lakh for gratuity payment (7th CPC). So an employee could receive ₹30 lakh in gratuity — they'd pay tax on ₹10 lakh (excess over ₹20 lakh exemption).

Question 7

What is the 240-day rule for gratuity?

Accepted Answer

Under the continuous-service rule as interpreted by courts, an employee who has worked for 4 years and completed 240 working days in the 5th year (for 6-day week establishments) is deemed to have completed 5 years of continuous service. For 5-day week establishments, the threshold is 190 days. This is significant for employees who resign during their 5th year — if they've crossed the 240/190-day mark, they qualify for gratuity.

Question 8

Can gratuity be forfeited?

Accepted Answer

Yes, gratuity can be forfeited partially or fully in two cases: (1) Damage/Loss: If services are terminated for willful omission/negligence causing damage to employer's property — forfeiture limited to the extent of loss. (2) Misconduct: Riotous/disorderly conduct, acts of violence, or offences involving moral turpitude during employment — full/partial forfeiture. Due process is mandatory — show-cause notice and opportunity to be heard must be provided before forfeiture.

Question 9

What is the difference between covered and not-covered establishments?

Accepted Answer

Covered under the Act: Factories, mines, oilfields, plantations, ports, railways, and shops/establishments with 10+ employees. Uses ÷26 divisor (26 working days/month). Not covered: Establishments with fewer than 10 employees or those specifically exempt. Uses ÷30 divisor (30 calendar days). The key differences: ÷26 formula gives a slightly higher gratuity than ÷30 for the same salary and years.

Question 10

Is gratuity paid on Basic salary only?

Accepted Answer

Gratuity is calculated on the Last Drawn Salary which includes Basic Salary + Dearness Allowance (DA). It does NOT include: HRA (House Rent Allowance), Special Allowance, Conveyance Allowance, Medical Allowance, or any other allowances. For employees not covered under the Act, some courts have interpreted 'salary' to include all regular payments, but the standard practice is Basic + DA.

Question 11

What happens to gratuity on death of the employee?

Accepted Answer

In case of death, the 5-year minimum service requirement is waived. Gratuity is payable to the nominee designated by the employee (Form F). If no nomination exists, it is paid to the legal heirs. The gratuity amount payable on death depends on years of service: Less than 1 year: 2× last drawn salary. 1-5 years: 6× last drawn salary. 5-11 years: 12× last drawn salary. 11-20 years: 20× last drawn salary. 20+ years: Half-month salary for every completed 6-month period (max 33×).

Question 12

Can an employee claim gratuity if they resign before 5 years?

Accepted Answer

A permanent employee who resigns before completing 5 years of continuous service is NOT entitled to gratuity. Fixed-term employees are different: since 21 November 2025 they qualify, pro rata, after 1 year of service. The other exceptions are: (1) Death — payable to nominee regardless of service length. (2) Disability — if incapacitated due to accident or disease. (3) 240-day rule — if the employee has worked 4 years and 240+ days in the 5th year, they may be deemed to have completed 5 years.

Question 13

Is gratuity part of CTC?

Accepted Answer

Yes, gratuity is typically included as a component of CTC (Cost to Company) by most Indian employers. Employers provision 4.81% of Basic + DA monthly towards gratuity (₹15/26 × 1/12 = 4.81%). However, gratuity is only PAYABLE upon completion of 5 years. If the employee leaves before 5 years, the employer retains the provisioned amount. This makes gratuity a 'deferred' component of CTC.

Question 14

What is the employer's obligation for gratuity payment?

Accepted Answer

Employers must: (1) Pay gratuity within 30 days of it becoming payable. (2) If delayed beyond 30 days, pay simple interest at 10% per annum. (3) Maintain records of nominations (Form F) from all employees. (4) Comply with the Act once 10+ employees are employed. (5) Can arrange payment through group gratuity insurance (LIC or other insurers) or make provisions in the balance sheet as per AS-15/Ind AS-19. Non-compliance penalty: Imprisonment up to 1 year, fine up to ₹10,000, or both.

Question 15

How does rounding work in gratuity calculation?

Accepted Answer

If an employee has served for a period that includes a fraction of a year: Fraction exceeding 6 months → rounded UP to the next full year. Fraction of 6 months or less → ignored. Example: 7 years 8 months → counted as 8 years. 7 years 4 months → counted as 7 years. This rounding significantly impacts the final gratuity amount, especially at higher salary levels.

Last Drawn Salary (Basic + DA)	₹50,000/month
Service	10 years 0 months
Effective Years (rounded)	10 years
Formula	(₹50,000 × 15 × 10) ÷ 26
Gratuity Amount	₹2,88,462
Tax-Exempt (max)	₹2,88,462
Taxable Gratuity	₹0

Criterion	Requirement
Continuous Service	Minimum 5 years with the same employer (permanent employees)
Fixed-Term Employees	Pro-rata gratuity after 1 year of service (from 21 November 2025)
240-Day Rule (6-day week)	If 240+ days worked in 5th year → deemed 5 years complete
190-Day Rule (5-day week)	If 190+ days worked in 5th year → deemed 5 years complete
Death	5-year rule waived — payable to nominee/legal heir
Disability	5-year rule waived — payable even with < 5 years service
Employee Types	All types — manual, clerical, supervisory (no salary ceiling)

Category	Formula	Example (₹50K, 10 years)
Covered under Act (÷26)	(Last Salary × 15 × Years) ÷ 26	(₹50,000 × 15 × 10) ÷ 26 = ₹2,88,462
Not Covered (÷30)	(Last Salary × 15 × Years) ÷ 30	(₹50,000 × 15 × 10) ÷ 30 = ₹2,50,000

Actual Service	Rounded To	Impact on ₹50K salary
7 years 4 months	7 years	₹2,01,923
7 years 7 months	8 years	₹2,30,769 (+₹28,846)
14 years 6 months	14 years	₹4,03,846
14 years 7 months	15 years	₹4,32,692 (+₹28,846)

Employee Type	Exemption Rule	Limit
Government	100% exempt — no conditions	No limit
Private (Covered)	LEAST of: Actual, ₹20L, Formula (15/26)	₹20 lakh (lifetime)
Private (Not Covered)	LEAST of: Actual, ₹20L, Half-month avg salary × years	₹20 lakh (lifetime)

Gratuity Calculator India 2026

🏆 Gratuity Calculator — India 2026

What is Gratuity?

Eligibility Criteria

Gratuity Calculation Formula

Year Rounding Rule

Tax Exemption (formerly Section 10(10))

Forfeiture of Gratuity

Death Gratuity — Enhanced Rates

Employer Obligations

Gratuity as Part of CTC

Gratuity vs Other Retirement Benefits

Gratuity for Fixed-Term Contract Employees

The 50% Wages Rule

Gratuity Calculator FAQ — India 2026

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Ground	Extent of Forfeiture	Condition
Damage/Loss to Employer	To the extent of loss caused	Willful omission or negligence
Misconduct	Full or partial	Riotous/disorderly conduct, violence, moral turpitude

Service Period	Gratuity Payable
Less than 1 year	2 × last drawn salary
1 to 5 years	6 × last drawn salary
5 to 11 years	12 × last drawn salary
11 to 20 years	20 × last drawn salary
20+ years	Half-month salary per completed 6 months (max 33×)

Aspect	Detail
CTC Component	4.81% of Basic + DA (= 15/26 × 1/12)
Monthly Provision	₹2,405 for ₹50,000 Basic+DA
Vesting	Only after 5 years of continuous service
Early Exit	If < 5 years, employer retains the provision

Benefit	Governed By	Employer / Employee	Tax Treatment
Gratuity	Code on Social Security, 2020	100% employer-funded	Exempt up to ₹20L
EPF	EPF Act, 1952	12% + 12% (shared)	Exempt if > 5 years (Sec 10(12))
EPS-95 Pension	EPS, 1995	From employer's 12%	Pension taxable as salary
NPS	PFRDA Act, 2013	10% + 14%/10%	60% exempt at exit (Sec 10(12A))
Superannuation	Company policy	Employer-funded	Exempt up to ₹15L