The gratuity formula
Not covered: Gratuity = 15 × Average (Basic + DA) of last 10 months × Years ÷ 30
Maximum payable: ₹20,00,000 (private sector)
The 15/26 represents 15 days' wages for each year of service, based on a 26-working-day month. Under the Act, a final year with more than six months of service is rounded up to a full year, so 7 years and 7 months counts as 8 years.
Worked example
| Last drawn basic + DA | 5 years | 10 years | 20 years |
|---|---|---|---|
| ₹30,000 | ₹86,538 | ₹1,73,077 | ₹3,46,154 |
| ₹50,000 | ₹1,44,231 | ₹2,88,462 | ₹5,76,923 |
| ₹1,00,000 | ₹2,88,462 | ₹5,76,923 | ₹11,53,846 |
Because gratuity is based on your last drawn salary, a raise late in your tenure increases the payout for every year you have worked.
Eligibility: the 5-year rule and the new 1-year rule
Permanent employees become eligible after five years of continuous service. The condition does not apply on death or disablement. The Code on Social Security, in force since 21 November 2025, adds an important change: fixed-term employees are eligible after one year of service, on a pro-rata basis. The Code also defines wages as at least 50% of total remuneration, which increases the gratuity base for people whose basic pay used to be low.
Is gratuity taxable?
Gratuity received by government employees is fully exempt. For private-sector employees, the least of the actual gratuity, the formula amount and ₹20 lakh is exempt under Section 10(10), as a lifetime limit across employers. Anything above that is taxed as salary. Central government employees have a gratuity ceiling of ₹25 lakh since January 2024.
Frequently asked questions
When am I eligible for gratuity?
After five years of continuous service for permanent employees, or one year for fixed-term employees under the Code on Social Security. The condition is waived on death or disablement.
How is gratuity calculated?
15 × last drawn basic + DA × completed years ÷ 26 for employees covered by the Act. Service above six months in the final year counts as a full year.
What is the maximum gratuity?
₹20 lakh for private-sector employees and ₹25 lakh for central government employees.
Is gratuity part of CTC?
Many employers include a gratuity provision of about 4.81% of basic in CTC, even though it is paid only when you leave after becoming eligible.