How to calculate gratuity, exactly
One formula, three traps: the wage definition, the rounding rule and the five-year gate. This guide works through all of them, with the ceiling and tax treatment as they currently stand.
Rates and thresholds re-verified 27 July 2026. Statutory figures change by notification, so always confirm against the current official source before acting.
The rule in one paragraph
Under the Payment of Gratuity Act framework, an employee who completes five years of continuous service is entitled, on leaving, to gratuity of fifteen days' wages for every completed year of service, computed as last drawn wages × 15/26 × completed years, where wages means basic plus DA and a month is counted as 26 working days. Service beyond six months in the final year rounds up to a full year. The statutory ceiling for private-sector employees is ₹20 lakh; employers may pay more voluntarily. The five-year condition falls away for death and disablement, where gratuity is payable regardless of tenure.
Why 15/26, and what 'last drawn' means
The 26 divisor converts a monthly wage into a daily wage using working days rather than calendar days, which is why the formula pays slightly more than a naive 15/30 would. 'Last drawn' means the final wage, not an average: a raise shortly before exit lifts the entire computation across all counted years, which is worth knowing on both sides of a resignation conversation. For piece-rated employees the Act uses an average of recent wages instead; seasonal establishments have their own seven-days-per-season variant.
Computing it, step by step
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1
Confirm eligibility
Check continuous service: five completed years with this employer (waived for death/disablement). Count from date of joining to last working day, treating authorised absences per the Act's continuous-service rules.
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2
Count the years
Take completed years, then apply the rounding rule to the final partial year: more than six months rounds up, six months or less drops. 7 years 8 months counts as 8; 7 years 5 months counts as 7.
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3
Fix the wage
Last drawn basic + DA, not gross, not CTC. For piece-rated workers, average the preceding three months' wages per the Act.
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4
Apply the formula and the cap
Gratuity = wage × 15/26 × counted years, capped at ₹20 lakh for private-sector employees. Anything the employer pays beyond formula or cap is voluntary.
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5
Apply tax treatment and pay
Compute the exempt portion per current limits, tax any excess as salary, and pay within the Act's thirty-day window, normally inside the full and final settlement, with the working shown on the statement.
A worked example
Last drawn basic + DA ₹40,000, service 9 years 7 months: counted years 10, gratuity = 40,000 × 15/26 × 10 = ₹2,30,769, fully within the cap and typically fully exempt. The same employee at 9 years 5 months: 9 years, ₹2,07,692: the two-month difference in exit date is worth ₹23,077. A senior manager at ₹2,80,000 basic + DA with 22 years: formula gives ₹35,53,846, but the payable statutory amount caps at ₹20,00,000; whether the employer tops up beyond the cap is policy, and the excess has its own tax treatment.
Figures are illustrative, for mechanism only. Verify current rates and your own structure before relying on any number.
Provisioning: the part employers forget until audit
Gratuity is an exit payment but an accruing liability: every employee past a year of service carries a computed accrual, and auditors expect it provisioned: larger establishments through actuarial valuation, smaller ones through the formula on current tenure and wages. The operational habit worth building: report the liability annually from live records, so the number in the books moves with reality rather than surprising the board at a senior exit. Some establishments fund the liability through a gratuity trust or insurer-managed scheme; that is a treasury choice the computation feeds either way.
Edge cases that deserve care
Transfers within a group: continuous service usually follows the employment entity, so an inter-company move can reset the clock unless service is contractually protected, worth writing down at transfer time, not exit time. Fixed-term employees: under the fixed-term employment framework, gratuity applies pro-rata on renewal patterns per current rules. Resignation versus termination changes nothing in the formula. And forfeiture, for termination on grounds of moral turpitude or wilful damage, is narrow, procedural and litigated; treat it as a legal decision with payroll consequences, never a payroll decision.
Communicating gratuity before it is asked
The cheapest gratuity dispute is the one prevented by visibility: an employee who can see their accruing entitlement (tenure counted, current formula value, the five-year vesting date) plans exits with open eyes and challenges nothing at settlement, because the number arrived with its history attached. Self-service portals that expose the accrual do more for exit smoothness than any settlement-day explanation. The same visibility disciplines the employer: a liability watched monthly is provisioned honestly, and the senior-tenure exits that would otherwise shock the quarter are visible years out.
How payroll software applies this
PeopleDeck computes gratuity from recorded tenure and the live wage structure, with eligibility checked, rounding applied, cap enforced and tax treatment current, as one line of the computed full and final settlement, with the arithmetic printed. It also reports the accruing liability across the workforce for provisioning, so year-end audit numbers come from the same records that will eventually pay the exits.
Go deeper: Full & final settlement · Gratuity calculator · Onboarding & exits
Primary sources: Ministry of Labour & Employment · India Code — Payment of Gratuity Act
Maintained by Databus Technology Solutions against the source notifications; the verification date above is refreshed whenever a figure changes. This guide explains rules and mechanics; it is not legal or tax advice. PeopleDeck applies statutory rates and generates upload-ready files; it never files returns on your behalf, and positions on contested questions belong with your consultant.
Frequently asked questions
Who is eligible for gratuity?
Any employee completing five years of continuous service with the employer, payable on resignation, retirement, termination or death/disablement (the last two without the five-year condition). Continuous service has its own definition; authorised leave and certain interruptions count toward it.
Does 4 years 7 months qualify?
On the plain rule, no: the six-month rounding applies to service beyond the fifth year, not toward reaching it. Judicial decisions have recognised 4 years and 240 days in the fifth year for certain establishments; if your case sits there, it is a professional-advice question, not a calculator one.
Is gratuity taxable?
For private-sector employees covered by the Act, gratuity is tax-exempt up to the least of the statutory computation, the ₹20 lakh cap and the amount received; anything above is taxable as salary. Verify the current exemption limits at the time of payment; they are notification-driven.
Can an employer pay more than the formula?
Yes: the Act is a floor, not a ceiling on generosity. Company schemes may use better multiples or waive the five-year gate; the statutory computation still defines the minimum and the tax-exemption reference.
When must gratuity be paid?
The Act's timeline is thirty days from it becoming payable; delay attracts interest. In practice it pays as part of the full and final settlement, which is why computing it from records rather than reconstructing tenure is the difference between a clean exit and a dispute.
Does gratuity accrue while someone is employed?
As an accounting matter, yes: companies provision the accrued liability annually (auditors expect it), even though the employee's entitlement crystallises only at five years. Payroll systems report this accrual from live tenure and wages.
How does gratuity interact with CTC?
Many employers include the annual gratuity accrual (roughly 4.81% of basic — 15/26 ÷ 12 annualised) as a CTC line. That is legitimate cost accounting, but the employee sees the money only on an eligible exit, so when comparing offers, treat a gratuity line inside CTC as deferred, conditional value, not pay.
Every exit computed from records, not memory.
Applied on every payslip, files generated for upload — per employee, per month.
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