What is the formula for gratuity calculation in India?

The gratuity formula under the Payment of Gratuity Act 1972 is: Gratuity = (15/26) × Last Drawn Basic Salary × Number of Completed Years of Service. The factor 15/26 represents 15 days' salary per year of service, where a month is considered to have 26 working days. For example, with a basic salary of ₹50,000 and 7 years of service: Gratuity = (15/26) × 50,000 × 7 = ₹2,01,923.

What is the maximum gratuity limit for private sector employees in 2026?

The maximum gratuity payable to private sector employees under the Payment of Gratuity Act is ₹20 lakh (twenty lakh rupees). This limit was increased from ₹10 lakh to ₹20 lakh in 2018. Any gratuity amount computed by the formula that exceeds ₹20 lakh, the employee receives a maximum of ₹20 lakh. However, an employer can voluntarily pay more than ₹20 lakh as ex-gratia gratuity; the amount above ₹20 lakh will be taxable in the employee's hands.

Are years of service rounded up for gratuity calculation?

Yes, with a specific rule: If the last partial year of service exceeds 6 months, it is rounded up to the next full year. If it is 6 months or less, it is ignored. For example, if you have worked for 7 years and 8 months, the 8 months (more than 6) are rounded up, so you get gratuity for 8 complete years. If you worked 7 years and 5 months, the 5 months are dropped and you get gratuity for 7 years.

What is included in basic salary for gratuity calculation?

For gratuity calculation, 'last drawn salary' typically includes basic salary and dearness allowance (DA). It does not include HRA, special allowance, medical allowance, bonus, incentives, commission, LTA, or any other allowances. Some companies may include other fixed components in the gratuity definition as per their own policies or employment contracts, but the statutory minimum is basic + DA only.

Does my employer have to pay gratuity if I resign before 5 years?

Generally, no. Under the Payment of Gratuity Act 1972, gratuity is payable only if you have completed at least 5 continuous years of service with the same employer. If you resign or are terminated before 5 years (other than due to death or disability), gratuity is not payable. There is an important exception: if the employee dies or becomes permanently disabled, gratuity is payable to the nominee or employee regardless of years of service.

Gratuity Calculation Guide India 2026 - Formula, Examples and Maximum Limit

Written by Suchitra Rao | Updated: April 2026 | 10 min read

Gratuity is a statutory lump-sum payment made by employers to employees as a token of appreciation for long service. It is governed by the Payment of Gratuity Act 1972. Understanding how gratuity is calculated helps you plan your retirement finances and verify that you have been paid the correct amount. This guide covers the formula, what counts as salary, rounding rules, the maximum cap, and worked examples at various salary/tenure combinations.

The Gratuity Formula: (15/26) × Basic Salary × Years of Service

The statutory formula under the Payment of Gratuity Act 1972 is:

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

Breaking down the components:

15: Represents 15 days' pay per year of service (gratuity entitlement).
26: The number of working days in a month (a month is considered to have 26 working days under the Act; Sundays are excluded).
Last Drawn Basic Salary: The basic salary plus Dearness Allowance (DA) as of the last month of employment. Other allowances (HRA, special allowance, LTA, etc.) are excluded.
Completed Years of Service: The number of full years worked. Partial years exceeding 6 months are rounded up to the next complete year; partial years of 6 months or less are ignored.

Worked Examples: Gratuity at Different Salaries and Tenures

Last Basic Salary (Monthly)	Years of Service	Calculation	Gratuity Payable
₹30,000	5	(15/26) × 30,000 × 5	₹86,538
₹50,000	7	(15/26) × 50,000 × 7	₹2,01,923
₹75,000	10	(15/26) × 75,000 × 10	₹4,32,692
₹1,00,000	15	(15/26) × 1,00,000 × 15	₹8,65,385
₹1,50,000	20	(15/26) × 1,50,000 × 20	₹17,30,769
₹2,00,000	20	(15/26) × 2,00,000 × 20 = ₹23,07,692 → capped	₹20,00,000 (cap)

Service Year Rounding Rules

The rounding rule for the last partial year of service is:

Partial year > 6 months: Round up to the next full year. Example: 7 years 7 months → treated as 8 years.
Partial year ≤ 6 months: Ignore the fraction. Example: 7 years 4 months → treated as 7 years.

Note: The 5-year eligibility threshold itself also follows this rule. If you have worked 4 years and 7 months, it rounds up to 5 years - making you eligible for gratuity even though you have not completed a strict calendar 5 years. This is an important nuance that many employees miss.

The ₹20 Lakh Cap and Voluntary Ex-Gratia

The Payment of Gratuity Act specifies a maximum ceiling of ₹20 lakh for employees covered under the Act (all establishments with 10 or more employees). This limit applies to:

Private sector employees
Autonomous bodies
Employees of PSUs/government companies that follow the Payment of Gratuity Act (rather than their own service rules)

Employers may voluntarily pay more than ₹20 lakh as ex-gratia gratuity (as a goodwill gesture), but:

The statutory gratuity amount (up to ₹20 lakh) is tax-exempt.
Any amount paid beyond the ₹20 lakh cap is taxable as income in the employee's hands under "Income from Salary."

Gratuity for Non-Act Employers and Other Calculation Methods

Some employers are not covered by the Payment of Gratuity Act (fewer than 10 employees) but still voluntarily pay gratuity. In such cases, the Court-approved alternative formula is:

Gratuity (non-Act) = (1/2) × Last Drawn Monthly Salary × Number of Completed Years of Service

Here, "last drawn monthly salary" typically means average of last 10 months' salary. This formula gives a higher per-year entitlement (1/2 of a month vs 15/26 of a month), but it is only applicable if the employer adopts it voluntarily.

Related Resources

Disclaimer: This guide is for educational purposes only. Gratuity entitlement and tax exemption limits are based on the Payment of Gratuity Act 1972 and FY 2025-26 income tax provisions. Consult your HR department or a labour law specialist if you have specific disputes about gratuity computation or payment.

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