Gratuity Calculation in India 2026: Formula, Eligibility, and Worked Examples

Who is eligible for gratuity

The Payment of Gratuity Act applies to every establishment with 10 or more employees: factories, mines, ports, plantations, railway companies, oil fields, and shops and establishments. Once an organisation crosses that headcount, it stays covered even if the team later shrinks.

The basic rule is five years of continuous service with the same employer. Resign, retire, or get terminated after five years and gratuity becomes payable. Leave before that and you usually walk away with nothing.

Two nuances matter. The Madras High Court reading of Section 2A says 4 years plus 240 days in the fifth year is treated as five completed years; most large employers and tribunals follow this view today. And the five-year minimum doesn't apply in cases of death or disablement, where gratuity is payable to legal heirs or the disabled employee regardless of tenure.

The formula, step by step

For employees covered under POGA, the calculation uses a 26-day month convention. A working month is treated as 26 days after excluding weekly offs.

Gratuity = (Basic + DA at exit) × 15 × Completed Years of Service / 26

For employees not covered by the Act (establishments with fewer than 10 employees, or contractual gratuity), the formula uses 30 instead of 26:

Gratuity = (Basic + DA) × 15 × Completed Years / 30

The "salary" in the formula is Basic + DA only. HRA, conveyance, special allowance, bonus, and reimbursements don't count. And it's the last drawn Basic, not an average.

Worked examples

Four cases, calculated end to end. Use these to sanity-check your own number.

Example 1: 7 years 8 months, Basic + DA ₹50,000

• Completed years: 8 (the 8 months round up because they're 6 or more).
• Gratuity = 50,000 × 15 × 8 / 26 = ₹2,30,769
• Well below the ₹20 lakh cap. Fully exempt for a private-sector employee.

Example 2: 4 years 7 months (the borderline case)

Two readings are possible. Strict literal: less than five years, no gratuity. Madras HC line followed by most large employers: 4 years plus 240 days in the fifth year qualifies. With 4 years 7 months you've crossed 240 days, so under the second reading you'd be paid for 5 completed years. Push HR for a written answer; the difference between ₹0 and a five-year payout is worth a clarifying email.

Example 3: 25 years, Basic + DA ₹1,20,000

• Gratuity = 1,20,000 × 15 × 25 / 26 = ₹17,30,769
• Within the ₹20 lakh ceiling. Full amount payable.
• For a private-sector employee, the entire ₹17,30,769 is tax-exempt under Section 10(10)(ii).

Example 4: 30 years, Basic + DA ₹1,80,000 (hits the cap)

• Formula amount = 1,80,000 × 15 × 30 / 26 = ₹31,15,384.
• POGA caps the statutory payout at ₹20,00,000. Employer pays ₹20 lakh.
• Tax exemption: least of (a) received ₹20 lakh, (b) ceiling ₹20 lakh, (c) formula ₹31.15 lakh. Least is ₹20 lakh, so the entire payout is exempt.
• Any ex-gratia paid above the cap is taxable as salary.

Rounding and counting completed years

Section 4(2) is clear. Any service of six months or more in the final year counts as a full year. Less than six months gets dropped. So 7 years 5 months becomes 7 for the formula. 7 years 6 months becomes 8.

Continuous service breaks only for unauthorised absence. Lockouts, lawful strikes, layoffs, sickness, accident, authorised leave, and maternity leave all count as continuous service.

Tax treatment under Section 10(10)

Gratuity is taxed differently depending on who you work for. Government employees, including central, state, local authority, and defence personnel, get full exemption under Section 10(10)(i). The figure doesn't enter taxable income at all.

Private-sector employees covered under POGA fall under Section 10(10)(ii). The exempt portion is the least of three numbers, and any excess is taxed as salary in the year of receipt:

1. Actual gratuity received
2. ₹20,00,000 (the statutory ceiling raised in 2018)
3. Amount calculated using the 15/26 formula on last drawn Basic + DA

Employees not covered by POGA fall under Section 10(10)(iii). Similar logic, but the formula uses 15/30 and the salary figure is the average of the last 10 months. The same ₹20 lakh aggregate cap applies.

Forfeiture and time limit for payment

Section 4(6) allows forfeiture in two situations: partial or full forfeiture (to the extent of damage caused) if the employee's service was terminated for wilful omission, negligence, or damage to employer property; full forfeiture if the termination was for riotous conduct, violence, or a moral-turpitude offence during employment. Forfeiture isn't automatic. The employer must issue a show-cause notice and pass a reasoned order. Tribunals routinely reverse casual forfeitures.

Gratuity must be paid within 30 days of the date it becomes payable, usually the last working day. Delay attracts simple interest at the central-government-notified rate (currently around 10% per annum). If the employer disputes the amount, they must pay the undisputed portion and deposit the disputed portion with the Controlling Authority.

Common mistakes HR teams make

• Calculating on gross or CTC instead of Basic + DA. The formula uses Basic + DA only.
• Using 30 days instead of 26 for covered employees. The 26-day convention is mandatory under POGA.
• Rounding 5 months up, or 7 months down. The cutoff is exactly six months.
• Refusing to pay employees with 4 years 240 days. Most courts have settled this.
• Holding the payout until the employee returns the laptop or signs a release. The 30-day clock starts on the last working day.
• Forgetting to deposit interest when payment is late.

How Indian HRM handles gratuity

Indian HRM provisions gratuity liability month by month for every eligible employee, applies the 26-day formula on exit, and tracks the ₹20 lakh cap and Section 10(10) exemption inside the full and final settlement screen. For a quick number without logging in, use the gratuity calculator: enter Basic, DA, and tenure to see the payable amount, exempt portion, and taxable excess in one screen.