Gratuity Rules in India: Who Qualifies, How It's Calculated, and Tax
The 5-year rule, the 26-day formula, the ₹20 lakh tax exemption — and what changes if you're not under the Gratuity Act.
Gratuity is a lump-sum statutory benefit paid by the employer at the time of separation — provided you've completed continuous service. Most employees underestimate how much this can be.
Who Is Eligible
A 2018 court judgement clarified that 4 years 240 days counts as 5 years for gratuity. Confirm with your HR — interpretation varies by employer.
- Employed for ≥ 5 years continuously with the same employer
- Exception: 5-year rule waived in case of death or disability
- Both private and public sector covered if employer has ≥ 10 employees
Formula
Covered under Gratuity Act: Gratuity = (Last drawn basic + DA) × 15/26 × completed years of service. Not covered: Gratuity = (Last drawn basic + DA) × 15/30 × completed years of service. Maximum payable is capped at ₹20 lakh.
Compute exact gratuity: Gratuity Calculator → https://calculatordesk.in/gratuity-calculator
Tax on Gratuity
- Govt employees: fully exempt
- Private employees covered under Act: least of (actual gratuity, ₹20 lakh, formula-based)
- Private employees not covered: least of (actual gratuity, ₹20 lakh, half-month avg salary × completed years)
Frequently Asked Questions
Can I get gratuity before 5 years?
Only in case of death or disability. Otherwise, leaving before 5 completed years means zero gratuity, regardless of how senior you were.
Is gratuity paid on basic only or on CTC?
On basic + DA only. Allowances like HRA, special allowance, performance bonus are not part of the calculation.
Does the ₹20 lakh cap apply per employer or lifetime?
Lifetime, across all employers. The cap was raised from ₹10 lakh to ₹20 lakh in 2018.