Gratuity Explained: Formula, Eligibility and Tax
Last updated: October 2026
Gratuity is a lump sum your employer pays when you leave after several years of service. It's a thank-you for long service, and for most salaried people it's tax-free.
The formula
Gratuity = (15 × last drawn salary × years of service) ÷ 26. Here "salary" means Basic + Dearness Allowance, and 26 stands for the working days in a month. In effect you get about 15 days' pay for every year you worked.
Examples
- ₹30,000 salary, 5 years → about ₹86,538
- ₹50,000 salary, 10 years → about ₹2,88,462
- ₹80,000 salary, 20 years → about ₹9,23,077
- ₹1,00,000 salary, 25 years → about ₹14,42,308
Who is eligible
- Permanent employees: generally after 5 years of continuous service. The 5-year condition doesn't apply in case of death or disablement.
- Fixed-term employees: under the new Labour Codes, in force since 21 November 2025, they're eligible after just 1 year of service, on a proportionate basis.
- Rounding: more than 6 months in your final year usually counts as a full year, so 9 years 7 months is treated as 10 years.
Tax
For private-sector employees, gratuity is tax-free up to ₹20,00,000 over your working life. Anything above that is taxed as salary.
A change to watch
The new Labour Codes define "wages" so that excluded allowances can't be more than half your pay. If your Basic + DA is less than half your salary, your gratuity may be worked out on a higher amount. Final central and state rules are still being notified, so check with your employer.