How many years do I need to work to be eligible for gratuity?

You need to complete at least 5 years of continuous service with the same employer to be eligible for gratuity. However, if you pass away or become disabled, gratuity is paid regardless of tenure.

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How gratuity is calculated in India

Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for their service. It is governed by the Payment of Gratuity Act, 1972, which applies to establishments with 10 or more employees. The formula is straightforward but has a few nuances worth understanding.

The gratuity formula

Gratuity = (15 × Last drawn basic+DA × Years of service) / 26

15 represents 15 days of salary for each year of service.
Last drawn basic+DA is your monthly basic salary plus Dearness Allowance at the time of leaving. HRA, bonuses, and other allowances are excluded.
Years of service is rounded: if you've worked more than 6 months in a partial year, round up to the next full year. For example, 7 years 8 months counts as 8 years.
26 is the number of working days assumed in a month (excluding 4 Sundays).
The result is capped at ₹20,00,000 under the Act.

Worked example

Input	Value
Monthly basic + DA	₹50,000
Years of service	8 years

Gratuity = (15 × 50,000 × 8) / 26 = 60,00,000 / 26 = ₹2,30,769

Eligibility for gratuity

You must have completed at least 5 years of continuous service with the same employer.
In case of death or disability due to accident or disease, gratuity is paid regardless of the length of service.
The 5-year rule is relaxed if 4 years and 8 months (or more) have been completed — courts have generally held this counts as 5 years.
Gratuity is payable on resignation, retirement, superannuation, death, or disablement.
Government employees are covered under different rules (CCS Gratuity Rules) and may receive higher amounts.

Tax treatment of gratuity

For employees covered under the Payment of Gratuity Act, gratuity up to ₹20,00,000 is fully exempt from income tax under Section 10(10) of the Income Tax Act. This exemption applies under both the old and new tax regimes.

Gratuity received above ₹20 lakh is taxable as salary income in the year of receipt. Government employees' gratuity is entirely exempt with no upper limit.

Gratuity for employees not covered under the Act

Some employees are not covered under the Payment of Gratuity Act — for example, those working in establishments with fewer than 10 employees, or employees covered under different central government rules. For such employees, the formula used is often: (15 × last drawn salary × years of service) / 30 (using 30 days instead of 26). The tax exemption in this case is the least of: actual gratuity received, ₹20,00,000, or half a month's average salary per completed year of service.

Frequently asked questions

What is the formula for gratuity calculation?

Gratuity = (15 × last drawn monthly basic+DA × years of service) / 26. The number 26 represents working days in a month. The result is capped at ₹20,00,000 under the Payment of Gratuity Act, 1972.

How many years do I need to work to get gratuity?

You need a minimum of 5 continuous years of service with the same employer. An exception: if you have completed 4 years and 8 months or more, many courts and the Ministry of Labour have held this satisfies the 5-year requirement. In case of death or disability, gratuity is payable regardless of service duration.

Is gratuity taxable?

For employees covered under the Payment of Gratuity Act, gratuity up to ₹20,00,000 is fully tax-exempt under Section 10(10). This exemption applies whether you are on the new or old tax regime. Amounts above ₹20 lakh are taxable as salary. Government employees receive full exemption with no cap.

Is gratuity included in CTC?

Yes, many companies include a gratuity provision (typically 4.81% of basic salary) in the CTC. However, you only actually receive the gratuity payout upon leaving the organisation after completing 5 years. During your tenure it is a notional provision in the CTC, not a monthly payment to you.

What happens to gratuity if I leave before 5 years?

If you leave before completing 5 years of continuous service, you are generally not entitled to gratuity. The only exceptions are death or disablement, in which case gratuity is paid to the nominee or legal heir regardless of tenure.

Disclaimer: This calculator uses the standard Payment of Gratuity Act formula and is for informational purposes only. Actual gratuity may vary based on your employment contract, company policy, and whether you are covered under the Act. Please consult an HR professional or labour law expert for your specific situation.

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