All you need to know about Gratuity Calculation and Eligibility
Gratuity is an important part of an employee’s compensation package, but many employees and employers are unclear about how it works. Common questions revolve around gratuity eligibility, gratuity calculation, and its taxability. In this post, we’ll break down everything you need to know about gratuity—how it’s calculated, who qualifies for it, and how it is taxed under Indian law.
1. What is Gratuity?
Gratuity is a monetary benefit paid by an employer to an employee for the services rendered over time. This payment is typically made to employees who have completed at least 5 years of continuous service with the same employer. Gratuity serves as a form of social security for employees, ensuring financial support when they leave the organization.
2. Is Gratuity Applicable to All Establishments?
Yes, according to the Payment of Gratuity Act, 1972, gratuity is applicable to all establishments that employ 10 or more people. This includes various sectors such as NGOs, educational institutions, and hospitals. Importantly, once an establishment is covered by the Act, it remains applicable even if the number of employees drops below 10.
3. Why is Gratuity Part of the CTC?
Gratuity may or may not be included in the Cost to Company (CTC) structure, depending on the company’s policy. However, many organizations do include gratuity as part of CTC because it represents a fixed contribution by the employer for the services provided by the employee. CTC is the total cost to the company for employing an individual, and gratuity is often considered a benefit included in this total cost.
4. Who is Eligible to Receive Gratuity?
Gratuity is payable to an employee under the following conditions:
- Retirement: When the employee retires after completing 5 years of service.
- Resignation: When the employee resigns after completing 5 years of service.
- Death or Disability: If the employee passes away or suffers disability due to illness or accident.
5. How Do I Apply for Gratuity?
When an employee resigns or retires and is eligible for gratuity, the employer is required to pay the gratuity amount as part of the employee’s Full and Final Settlement. Employees don’t typically need to apply separately for gratuity, as it is calculated and paid by the employer upon termination.
6. How is Gratuity Calculated?
Gratuity is calculated based on the number of years of service and the last drawn salary (Basic Salary + Dearness Allowance).
Formula:
Gratuity = (Number of years of service) × (Last drawn salary) × 15 ÷ 26
- Example: If Ankit worked for 10 years and his last drawn salary (Basic + Dearness Allowance) is ₹30,000, his gratuity would be:
- Gratuity = 10 × 30,000 × 15 ÷ 26 = ₹1,73,076
7. Can an Employee Claim Gratuity Before Completing 5 Years?
An employee can claim gratuity before completing 5 years of service only in the event of death or disability due to illness or accident. Additionally, as per a ruling by the Madras High Court, an employee who has completed 240 days of service in the 5th year of employment may be eligible for gratuity.
8. Is Gratuity Taxable?
Gratuity is tax-exempt for government employees. For non-government employees, gratuity can also be exempt from tax, but only up to a certain limit of ₹20 lakhs. Any gratuity received above this limit will be taxable.
9. Can an Employer Forfeit Gratuity?
Yes, an employer can forfeit the gratuity of an employee if the employee’s services are terminated due to:
- Disorderly conduct or violence.
- Any offense related to immorality during the course of employment, provided a proper inquiry is conducted, and the employee is found guilty.
10. Is There a Cap on the Gratuity Amount?
Yes, under the Payment of Gratuity Act, the maximum gratuity amount an employee can receive is ₹20 lakhs. This cap applies irrespective of the number of years of service.
11. How Long Does It Take for the Employer to Pay Gratuity?
According to the law, the employer must pay the gratuity within 30 days from the date it becomes due. If the employer fails to pay within this period, they are required to pay interest on the delayed amount until it is settled.
12. What is 15/26 in Gratuity Calculation?
In gratuity calculation, 15/26 is a standard factor used to calculate the amount of gratuity payable to an employee under India’s Payment of Gratuity Act, 1972.
It means 15 days’ salary for every completed year of service, divided by 26 working days in a month.
The gratuity formula is:
Gratuity = (Last drawn salary × 15 × Number of completed years of service) ÷ 26
Where:
- Last drawn salary = Basic salary + Dearness allowance
- 15 = 15 days’ salary for each year of service
- 26 = Assumes 26 working days in a month, excluding weekly offs
This 15/26 fraction ensures a fair calculation of gratuity, considering only actual working days and not total calendar days.
Example of Gratuity Calculation Using 15/26
Suppose:
- Last drawn salary (Basic + DA) = ₹40,000
- Completed years of service = 8 years
Then,
Gratuity = (40,000 × 15 × 8) ÷ 26
Gratuity = (48,00,000) ÷ 26
Gratuity ≈ ₹1,84,615
Thus, the employee would be entitled to approximately ₹1,84,615 as gratuity.
13. Why is 26 Used in Gratuity Calculation?
In India, 26 represents the number of working days in a month, assuming four weekly holidays (Sundays) are non-working.
By using 26 instead of 30 or 31, the gratuity amount reflects only the employee’s actual working days, making the calculation more accurate.
14. Where can I read more about the Payment of Gratuity Act 1972?
You can read the rules pertaining to the Payment of gratuity act of 1972
FAQs on Gratuity Calculations
Q. What does 15 days’ salary mean in gratuity?
It means the employee is entitled to 15 days’ worth of salary for every completed year of service, calculated based on the last drawn salary.
Q. Why is gratuity divided by 26 and not 30?
It is divided by 26 because gratuity is calculated based on actual working days in a month, excluding weekly offs.
Q. Who is eligible for gratuity in India?
An employee becomes eligible for gratuity after completing five continuous years of service with the same employer.
Q. Is gratuity taxable in India?
Gratuity is tax-free up to a certain limit as per Section 10(10) of the Income Tax Act. As of 2025, gratuity received up to ₹20 lakh is tax-exempt for private-sector employees.
Q. Can gratuity be paid before 5 years?
In some cases like death or disability, gratuity may be paid even if the employee has not completed 5 years.