Quick Answer: Gratuity = (Last drawn salary × 15/26) × Years of service. The formula uses 15 days of wages for every completed year of service (26 working days in a month). Maximum tax-free gratuity is ₹20 lakh for employees covered under the Payment of Gratuity Act. Gratuity is payable after 5 years of continuous service (4 years 240 days in some interpretations).
Gratuity — A Reward for Long Service
Gratuity is a lump-sum payment made by the employer to an employee as a token of gratitude for the services rendered. Under the Payment of Gratuity Act, 1972, it is mandatory for establishments with 10 or more employees. An employee becomes eligible after completing 5 years of continuous service.
Gratuity Formula
For private sector employees (covered under Gratuity Act):
Gratuity = (Basic + DA) × 15/26 × Years of Service
For government employees: Gratuity = (Basic + DA) / 4 × Years of Service
Frequently Asked Questions
Yes. The Supreme Court has held that if an employee has served for more than 4 years and 240 days in the 5th year, they are eligible for gratuity. However, the strict requirement is 5 completed years for most cases. Many companies follow the conservative 5-year rule.
There is no statutory maximum gratuity amount. However, the tax-free limit for private sector employees covered under the Gratuity Act is ₹20 lakh (raised from ₹10 lakh in 2019). Gratuity above ₹20 lakh is taxable as salary income.