Gratuity Calculation Guide 2026: Formula, Eligibility & Tax Exemption

Gratuity is a monetary benefit paid by an employer to an employee as a token of gratitude for rendering continuous service. In India, gratuity is governed by the Payment of Gratuity Act, 1972 and forms a key component of an employee's total retirement or resignation payout package.

Whether you are resigning after completing 5 years at an organization or planning for retirement, understanding how your gratuity payout is calculated and how much of it is exempt from income tax is essential. This guide explains gratuity eligibility rules, breaks down the 15/26 formula, details Section 10(10) tax exemptions, and shows how to estimate your payout using the CalculatorAll Gratuity Calculator.

Quick Answer

For organizations covered under the Payment of Gratuity Act, gratuity is calculated using the standard 15/26 formula:

Gratuity = (15 × Last Drawn Basic Salary × Completed Years of Service) / 26

Where:

• Last Drawn Basic Salary: Last drawn Basic Salary + Dearness Allowance (DA).
• Completed Years of Service: Total continuous years worked (periods over 6 months are rounded up to the next full year).
• 15/26: Represents 15 days' salary out of 26 working days in a month.

For example, an employee with a last drawn basic salary of ₹80,000 who served continuous tenure of 10 years will receive an estimated gratuity payout of ₹4,61,538.

Eligibility Criteria Under the Gratuity Act

To be eligible to receive gratuity from your employer in India:

1. 5 Years Continuous Service: You must have completed at least 5 years of continuous service with the same employer (except in cases of death or permanent disablement, where the 5-year requirement is waived).
2. Organization Size: The employer must have employed 10 or more employees on any single day in the preceding 12 months.
3. Trigger Events: Gratuity becomes payable upon retirement, superannuation, resignation, or termination.

Tenure Rounding Rules:

• If you complete 7 years and 7 months, your service tenure is rounded UP to 8 years.
• If you complete 7 years and 4 months, your service tenure is rounded DOWN to 7 years.

Gratuity Formulas: Covered vs. Non-Covered Employees

Tax Exemption Limits (Section 10(10))

Gratuity received by employees enjoys significant tax exemptions under Section 10(10) of the Income Tax Act:

1. Government Employees: Gratuity received by central/state government employees or defense personnel is 100% tax-free without any upper cap limit.
2. Private Sector Employees (Covered Act): Exempt up to the lowest of:
   • Actual gratuity amount received.
   • Calculated eligible gratuity formula amount.
   • Statutory maximum ceiling limit of ₹20 Lakhs (lifetime limit across all employers).

Any gratuity amount received above the statutory ₹20 Lakh exemption limit is taxable under "Income from Salaries".

Step-by-Step Numerical Example

Let's calculate gratuity for a private sector employee covered under the Act:

• Last Drawn Basic Salary + DA: ₹1,00,000
• Tenure: 12 Years and 8 Months (Rounded to 13 Years)

Step 1: Compute 15 Days' Daily Wage

₹1,00,000 × 15 = ₹15,00,000

Step 2: Divide by 26 Working Days

₹15,00,000 / 26 = ₹57,692.31

Step 3: Multiply by Completed Years (13)

Gratuity = ₹57,692.31 × 13 = ₹7,50,000

Taxability:

Since ₹7,50,000 is below the ₹20 Lakh statutory limit, the entire ₹7,50,000 payout is 100% tax-free.

How to Calculate Gratuity Using CalculatorAll

Instead of doing manual 15/26 calculations and tenure rounding, use the CalculatorAll Gratuity Calculator.

1. Enter Monthly Basic Salary + DA: Input your last drawn monthly basic pay.
2. Enter Total Years of Service: Input your exact service duration.
3. Select Act Coverage: Choose whether your organization is covered under the Act.
4. View Instant Payout & Tax Exemption: See your exact gratuity entitlement and tax-free status.

Frequently Asked Questions

Is 5 years of service strictly mandatory for gratuity?

Yes, 5 years of continuous service is mandatory for resignation or retirement. However, in the event of an employee's death or disablement due to accident/disease, gratuity is paid regardless of tenure.

Is gratuity calculated on total CTC or Basic Salary?

Gratuity is calculated strictly on your Basic Salary + Dearness Allowance (DA), not your overall Gross Salary or total CTC.

What is the maximum tax-free limit for gratuity in India?

The maximum lifetime tax-free gratuity exemption limit for non-government employees is ₹20 Lakhs.