How Gratuity is Calculated in India (Formula + Examples)
Gratuity looks simple — "15 days' salary for every year of service" — but the details decide the number: which divisor applies, how part-years are rounded, what counts as salary, and where the cap kicks in. This guide walks through the gratuity formula step by step, with worked examples for both covered and non-covered employees.
If you would rather see the result than run the maths, the Gratuity Calculator applies every rule below automatically and shows a step-by-step breakdown.
The two formulas
The gratuity formula depends on whether your employer is covered under the Payment of Gratuity Act, 1972:
Covered under the Act:
Gratuity = (15 × last drawn salary × years of service) ÷ 26
Not covered under the Act:
Gratuity = (15 × last drawn salary × years of service) ÷ 30
The only structural difference is the divisor — 26 for covered employees (treating a month as 26 working days) versus 30 for non-covered employees (a full calendar month). Because 15 ÷ 26 (≈ 0.577) is larger than 15 ÷ 30 (= 0.5), covered employees receive more for the same salary and tenure.
What "salary" means
Throughout the formula, salary = last drawn Basic Salary + Dearness Allowance (DA). It does not include HRA, bonus, overtime, or other allowances. For non-covered employees, the reference is technically the average of the last 10 months' salary, but for a stable salary this equals the last drawn figure — which is what the Gratuity Calculator uses.
The rounding rule for part-years
Part-years are handled differently under each formula:
- Covered: if the months in your final year exceed 6, the year rounds up to a full year. So 5 years 7 months counts as 6 years, but 5 years 6 months counts as 5 years.
- Not covered: only fully completed years count; trailing months are ignored entirely.
This single rule can change your gratuity by a meaningful amount, which is why the calculator asks for both years and months separately.
Step-by-step
- Step 1 — Identify your last drawn salary (Basic + DA).
- Step 2 — Determine coverage — is your employer under the Act? This sets the divisor (26 or 30).
- Step 3 — Compute the formula-years — apply the rounding rule (covered) or take whole years only (not covered).
- Step 4 — Apply the formula — 15 × salary × years ÷ divisor.
- Step 5 — Apply the ₹20 lakh cap — the payable amount cannot exceed ₹20,00,000.
- Step 6 — Check eligibility — you need 5 years of continuous service; below that, nothing is payable.
Worked example 1: Covered employee
Anita works for a covered company. Her last drawn Basic + DA is ₹60,000, and she has completed 12 years and 8 months.
- Coverage: covered → divisor 26
- Formula-years: 8 months > 6 → rounds up → 13 years
- Gratuity = (15 × 60,000 × 13) ÷ 26 = 1,17,00,000 ÷ 26 = ₹4,50,000
Anita's ₹4,50,000 is below the ₹20 lakh cap, so the full amount is payable and tax-exempt.
Worked example 2: Not-covered employee
Ravi works for an establishment not covered by the Act. Same salary (₹60,000) and the same 12 years 8 months.
- Coverage: not covered → divisor 30
- Formula-years: whole years only → 12 years (the 8 months are ignored)
- Gratuity = (15 × 60,000 × 12) ÷ 30 = 1,08,00,000 ÷ 30 = ₹3,60,000
The same person with the same tenure and salary receives ₹90,000 less simply because the employer is not covered — the combined effect of the larger divisor and the dropped part-year. Toggle the coverage switch in the Gratuity Calculator to see this difference for your own numbers.
Worked example 3: The ₹20 lakh cap
Consider a senior employee with a last drawn salary of ₹2,00,000 and 35 years of covered service:
- Formula = (15 × 2,00,000 × 35) ÷ 26 = 10,50,00,000 ÷ 26 = ₹40,38,462
- Cap applied → payable = ₹20,00,000
Beyond a certain point, extra years or salary no longer increase your gratuity because of the cap. The "Gratuity by Years of Service" chart in the Gratuity Calculator shows exactly where your curve flattens at ₹20 lakh.
Eligibility: the 5-year rule
No matter what the formula produces, gratuity is payable only if you have 5 years of continuous service (except on death or disablement). If you leave earlier, the payable amount is zero. Some courts have accepted 4 years and 240 days as meeting the fifth-year requirement, but to stay conservative the calculator uses whole-year eligibility and clearly flags borderline cases.
From gratuity to your retirement plan
Gratuity is a one-time boost, best viewed alongside your other retirement building blocks:
- Your provident fund corpus — project it with the EPF Calculator.
- Voluntary long-term savings — the PPF Calculator and SIP Calculator.
- The tax angle — the Income Tax Calculator shows how the gratuity exemption and your regime choice interact.
Frequently asked questions
What is the gratuity formula? For covered employees: (15 × last drawn salary × years of service) ÷ 26. For non-covered employees, the divisor is 30 and only completed years count.
Why is the divisor 26 for covered employees? Because the Act treats a month as 26 working days (excluding four weekly offs), which makes 15 days' wages a larger fraction of monthly pay than the 30-day basis.
Does salary mean my full CTC? No. It means your last drawn Basic Salary plus Dearness Allowance only.
How are extra months counted? For covered employees, more than 6 months rounds up to a full year. For non-covered employees, extra months are ignored.
Is there a maximum gratuity? Yes, ₹20 lakh under the Act. The calculator applies this cap automatically.
How do I calculate mine quickly? Enter your salary, years, months, and coverage into the Gratuity Calculator for an instant, step-by-step result.
Run your numbers: the Gratuity Calculator applies the formula, rounding, and cap, then compare your wider plan with the EPF and PPF calculators.
Disclaimer: This article is for general information only and is not legal or tax advice. Verify against official sources or consult a qualified professional.