How Much Gratuity Are You Entitled to Receive?
Gratuity is a lump-sum retirement and severance benefit mandated under the Payment of Gratuity Act, 1972 for salaried employees who complete at least 5 years of continuous service in an establishment. For a private sector employee with a last drawn monthly basic salary (+ DA) of ₹80,000 and 15 completed years of service, the statutory gratuity payout is exactly ₹6,92,308 `[(15 × 80,000 × 15) / 26]`—and the full sum is 100% tax-free under Section 10(10) because it falls well within the ₹20,00,000 lifetime statutory ceiling.
The Statutory 15/26 Formula Explained
The statutory calculation divides a monthly salary into 26 working days (excluding 4 Sundays) and provides 15 days of wages for every completed year of service:
Where:
- Last Drawn Basic + DA: Basic salary plus Dearness Allowance from your final month of employment (special allowances and bonuses are excluded).
- Completed Years of Service: Total tenure in years. Any fractional period of 6 months or more is rounded up to a full year (e.g. 8 years 7 months = 9 years).
- 26: Fixed statutory constant representing 26 working days per month.
Gratuity Payout & Tax Exemption Comparison Tables
Table 1: Gratuity Payout Across Basic Salaries and Service Tenures (Under Act — 15/26 Rule)
| Last Drawn Basic (+DA) | 5 Years | 10 Years | 15 Years | 20 Years | 30 Years |
|---|---|---|---|---|---|
| ₹30,000 / month | ₹86,538 | ₹1,73,077 | ₹2,59,615 | ₹3,46,154 | ₹5,19,231 |
| ₹50,000 / month | ₹1,44,231 | ₹2,88,462 | ₹4,32,692 | ₹5,76,923 | ₹8,65,385 |
| ₹80,000 / month | ₹2,30,769 | ₹4,61,538 | ₹6,92,308 | ₹9,23,077 | ₹13,84,615 |
| ₹1,20,000 / month | ₹3,46,154 | ₹6,92,308 | ₹10,38,462 | ₹13,84,615 | ₹20,00,000 (Capped) |
Table 2: Covered Under Act vs. Not Covered Under Act Comparison
| Parameter | Covered Under Gratuity Act | Not Covered Under Gratuity Act |
|---|---|---|
| Calculation Formula | (15 × Basic × Years) / 26 | (15 × 10-Month Avg Basic × Years) / 30 |
| 6-Month Rounding Rule | Yes (>6 mos = +1 year) | No (Only completed full years count) |
| Tax Exemption Ceiling | ₹20,00,000 | ₹20,00,000 |
Table 3: Tax Exemption Matrix under Section 10(10)
| Employee Category | Exemption Limit | Taxability on Excess Amount |
|---|---|---|
| Govt Employees (Central/State/Defense) | 100% Tax-Free (Unlimited) | N/A (Fully Exempt) |
| Private Sector (Covered under Act) | Lowest of: 1) ₹20 Lakhs, 2) Actual Gratuity, 3) 15/26 formula | Taxable at normal slab rates |
| Private Sector (Not covered under Act) | Lowest of: 1) ₹20 Lakhs, 2) Actual Gratuity, 3) 15/30 formula | Taxable at normal slab rates |
Frequently Asked Questions (FAQs)
What is the statutory gratuity formula in India?
For organizations covered under the Payment of Gratuity Act 1972, the formula is: Gratuity = (15 × Last Drawn Basic Salary & DA × Completed Years of Service) / 26, where 26 represents total working days in a calendar month.
What is the minimum service period required to be eligible for gratuity?
An employee must complete at least 5 years of continuous service in a company to be eligible for gratuity. The 5-year requirement is waived in case of death or permanent disability of the employee.
What is the maximum tax-free gratuity exemption limit?
Under Section 10(10) of the Income Tax Act, gratuity received by private sector employees is tax-exempt up to a cumulative lifetime ceiling of ₹20 Lakhs. For Central and State Government employees, the entire gratuity payout is 100% tax-free without any limit.
How does the 6-month service rounding off rule work?
If an employee serves more than 6 months in their final fractional year, it is rounded up to a full year for gratuity calculation. For example, 7 years and 7 months is counted as 8 years, whereas 7 years and 4 months is counted as 7 years.
How is gratuity calculated for employees not covered under the Gratuity Act?
For establishments not covered under the Act, the formula is: Gratuity = (15 × Average Basic Salary of Last 10 Months × Completed Years of Service) / 30. Fractional months are not rounded up.
Can an employer pay more than ₹20 Lakhs as gratuity?
Yes, an employer can legally pay any amount as gratuity. However, any amount exceeding the statutory ₹20 Lakh threshold is added to your taxable income and taxed according to your applicable income tax slab rate.
Can an employer forfeit or deny gratuity?
Gratuity can only be forfeited if the employee's services were terminated for riotous or disorderly conduct, acts of violence, moral turpitude, or willful damage causing financial loss to the employer (forfeited only up to the extent of financial loss).
Within how many days must an employer disburse gratuity upon resignation?
Under Section 7(3) of the Payment of Gratuity Act, the employer must pay the gratuity within 30 days of it becoming payable. If delayed beyond 30 days, the employer is liable to pay simple interest on the overdue amount.