Gratuity calculation looks simple on paper. But between the rounding rules, the salary base question, the ₹20 lakh cap, and the new Labour Code changes, it trips up HR teams far more often than it should. I’ve seen companies overpay because they used gross salary instead of basic. I’ve seen companies underpay because they forgot to round up the service period. Both create problems — one legal, one with the employee.
So let me walk you through this properly. Formula, examples, common mistakes, and a calculator to get the number right every time.
Who is Eligible for Gratuity?
Before calculating, you need to confirm eligibility.
The Payment of Gratuity Act covers every establishment that has had 10 or more employees at any point. And here’s something many business owners don’t realize — once you cross that threshold, the Act stays applicable even if your team size later shrinks below 10. You can’t “exit” the Act by reducing headcount. For the employee, the trigger is 5 years of continuous service with the same employer. Resign after 4 years and 11 months — no gratuity. Complete 5 years — it becomes a legal entitlement, not a favor.
There’s one important nuance I always flag for HR teams: if an employee has completed 4 years and 240 working days in their fifth year, most courts treat that as 5 complete years. So before you reject a gratuity claim because someone left at 4 years and 9 months, count the actual working days in that fifth year. The difference can be significant.
Gratuity Calculation New rule from November 2025:
One more thing worth flagging — especially if you hire on fixed-term contracts. Under the new Labour Codes effective November 21, 2025, fixed-term employees no longer need to wait 5 years for gratuity. After just 1 year of service, they become eligible for pro-rata gratuity. If your company relies heavily on contract hires, this changes your gratuity liability significantly.
Always check with: Ministry of Labour
The Gratuity Calculation Formula
For companies covered under the Payment of Gratuity Act — which is most companies with 10+ employees:
Gratuity = (Last Drawn Basic + DA) × 15 × Years of Service ÷ 26
In simple terms:
- Last Drawn Salary = Basic Salary + Dearness Allowance (DA)
- 15 = 15 days’ salary for every completed year
- 26 = Number of working days considered in a month
- Years of Service = Total completed years
Let me break down what each part means.
Last Drawn Basic + DA — This is the salary base for gratuity. Not gross salary. Not CTC. Only Basic Salary plus Dearness Allowance. This is where most errors happen. If someone’s gross is ₹60,000 but their Basic is ₹30,000, gratuity is calculated on ₹30,000.
15 — Represents 15 days of wages per completed year of service.
26 — The number of working days assumed in a month (excluding Sundays).
Years of Service — Completed years, with the rounding rule: if the last year has more than 6 months, round up to the next full year. Less than or equal to 6 months, round down.
For companies not covered under the Act (fewer than 10 employees, though many still pay voluntarily):
Gratuity = (Last Drawn Basic + DA) × 15 × Years of Service ÷ 30
This uses 30 as the divisor instead of 26 — which results in a lower gratuity amount.
We’ve built a free Gratuity Calculator that does all of this for you — enter your Basic Salary, Years of Service, and additional months, and get your gratuity amount instantly.
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Gratuity Calculations Example
Example 1 — Standard case
Ramesh worked at a manufacturing company for 8 years and 4 months. His last drawn Basic Salary was ₹35,000. No DA.
Service period rounding: 8 years 4 months — less than 6 months in the last year, so count as 8 years.
Gratuity = ₹35,000 × 15 × 8 ÷ 26 = ₹1,61,538
Example 2 — With rounding up
Sunita worked for 6 years and 9 months. Last drawn Basic + DA = ₹45,000.
Service period: 6 years 9 months — more than 6 months in the last year, round up to 7 years.
Gratuity = ₹45,000 × 15 × 7 ÷ 26 = ₹1,82,692
Had we not rounded up, she’d have gotten ₹1,56,923. That’s a difference of ₹25,769 — which is material for the employee and a compliance risk for the company.
Example 3 — High earner approaching the cap
Vikram served 25 years. Last drawn Basic = ₹80,000.
Formula gives: ₹80,000 × 15 × 25 ÷ 26 = ₹11,53,846
This is below the ₹20 lakh cap, so full amount is payable.
If Vikram’s Basic were ₹1,50,000 and service 30 years: ₹1,50,000 × 15 × 30 ÷ 26 = ₹25,96,153 — exceeds ₹20 lakh cap. Pay ₹20 lakh.
Tax on Gratuity
For private sector employees, gratuity up to ₹20 lakh is fully exempt from income tax under Section 10(10) of the Income Tax Act. Anything above ₹20 lakh is added to taxable income and taxed at the applicable slab rate.
Government employees enjoy a full exemption — no upper limit. The entire gratuity is tax-free regardless of the amount. In case of death, gratuity paid to the nominee or legal heir is fully exempt with no ceiling.
Payment Timeline
Gratuity must be paid within 30 days of the date it becomes payable. Delay attracts interest at 10% per annum for every year of delay. That’s a real cost — and it compounds. Make sure your FnF process includes gratuity calculation on Day 1, not as an afterthought after the employee has already left.
How Runtime HRMS Handles Gratuity Calculation
This is exactly the kind of calculation that looks simple but quietly goes wrong when done manually. Wrong salary base, missed rounding, overlooked fixed-term staff — each one is a potential compliance issue.
At Runtime HRMS, gratuity is tracked automatically from Day 1. The moment an employee’s profile is set up, the system starts provisioning gratuity monthly based on their Basic Salary and service period. By the time they exit, the number is ready — no last-minute spreadsheet, no guesswork, no risk of getting it wrong.
Frequently Asked Questions
Is gratuity calculated on gross salary or basic salary?
Gratuity calculated on Basic Salary plus Dearness Allowance, not on gross salary or on CTC.
Can an employer forfeit gratuity?
Yes, but only in specific circumstances.