Complete guide
Reviewed July 2026Gratuity is a lump-sum reward for long service - money your employer pays when you leave, provided you've stayed long enough to qualify. It's a statutory benefit under the Payment of Gratuity Act for most salaried employees, and for many it's one of the larger cheques of their career.
This calculator estimates your gratuity from your last drawn salary and years of service using the official formula. Below you'll find the formula with each term explained, the eligibility rules (including the crucial 4-years-240-days nuance), the tax exemption, worked examples and the mistakes that lead to wrong expectations.
Because gratuity rewards tenure, small differences in how service years are rounded can change the payout meaningfully - so it pays to understand exactly how the calculation works.
The gratuity formula
Gratuity = 15 / 26 x last drawn salary x years of service Last drawn salary = basic pay + dearness allowance (DA) 26 = working days assumed per month 15 = half a month's wages per completed year
The formula pays roughly half a month's salary for every completed year of service. The 26 represents assumed working days in a month (excluding the four Sundays), and 15 is half of that - so 15/26 of your monthly salary is one year's gratuity. 'Salary' here means basic plus DA, not your full CTC.
Worked examples
- Last salary (basic+DA) Rs 40,000; 10 years of service: gratuity = 15/26 x 40000 x 10 = Rs 2,30,769.
- Last salary Rs 60,000; 25 years: 15/26 x 60000 x 25 = Rs 8,65,385.
- Rounding of years: 7 years 8 months rounds to 8 (6+ months rounds up); 7 years 5 months rounds to 7.
- For employees not covered by the Act, some employers use 15/30 instead of 15/26, giving a smaller figure - check your policy.
Eligibility, rounding and tax
Who qualifies
- Generally, 5 continuous years of service with the same employer.
- The '4 years 240 days' rule: in the fifth year, working 240 days is often treated as a full year, so some employees qualify at 4 years and 240 days.
- The 5-year rule is waived if service ends due to death or disablement - the nominee/employee is paid regardless of tenure.
- Applies to establishments with 10 or more employees under the Payment of Gratuity Act.
Rounding of service years
Only completed years count, but the final part-year rounds: 6 months or more rounds up to a full year, less than 6 months rounds down. So 12 years 7 months counts as 13 years, while 12 years 4 months counts as 12. This single rule can swing the payout by half a month's salary.
Tax exemption
| Employee type | Exemption |
|---|---|
| Government employees | Fully tax-exempt |
| Private (covered by Act) | Least of: actual gratuity, formula amount, or the statutory cap |
| Private (not covered) | Least of: actual, half-month-avg-salary formula, or the cap |
Using this calculator
- Enter your last drawn monthly salary (basic + DA, not full CTC).
- Enter your completed years of service, rounding the final part-year (6+ months up).
- Read the estimated gratuity payout.
- Compare against the tax exemption cap to estimate any taxable portion.
Common mistakes
- Using full CTC or gross salary instead of basic + DA - this inflates the estimate.
- Forgetting the rounding rule on the final part-year.
- Assuming you always need exactly 5 years - the 4-years-240-days rule can qualify you earlier.
- Overlooking the lifetime tax-exemption cap across all employers.
- Applying 15/26 when your (non-covered) employer uses 15/30, which lowers the payout.
Frequently asked questions
Glossary
- Gratuity
- A lump-sum service reward paid by an employer on qualifying exit.
- Basic + DA
- Basic pay plus dearness allowance - the salary base for gratuity.
- Payment of Gratuity Act
- The law governing gratuity for establishments with 10+ employees.
- Continuous service
- Uninterrupted employment; 240 days in a year often counts as a full year.
- 4 years 240 days rule
- Working 240 days in the fifth year can qualify you before a full 5 years.
- Exemption cap
- The lifetime tax-free gratuity limit (currently Rs 20 lakh).
- Nominee
- The person who receives gratuity if the employee dies.
- CTC provision
- The gratuity amount employers set aside within Cost to Company.
Key takeaways
Gratuity rewards tenure: 15/26 x last (basic+DA) salary x completed years, roughly half a month's pay per year. Qualify with 5 continuous years (or 4 years 240 days), round the final part-year at the 6-month mark, and remember the salary base is basic+DA, not CTC. The payout is tax-exempt up to a lifetime cap (currently Rs 20 lakh); anything above is taxed as salary.
Enter your basic+DA salary and years of service above for your estimated gratuity; then check it against the tax-exemption cap to see any taxable portion.