Gratuity Calculation in India – Complete 2025 Guide

Gratuity is a financial reward given to employees who have offered extended service to their employer. Governed by the Payment of Gratuity Act, 1972, it is a legally binding payment due upon retirement, resignation, termination, death, or disability. In this guide, you’ll learn how gratuity is calculated, eligibility rules, tax implications, formulae, and use our embedded gratuity calculator for accurate computation.

Understanding Gratuity

Gratuity is a lump sum payment made by the employer to an employee in recognition of continuous service. It’s not a part of the employee’s monthly salary but is payable as a benefit upon the end of employment. The amount of gratuity increases with the number of years served and the salary drawn.

Legal Framework

The Payment of Gratuity Act, 1972 governs gratuity payments in India. All employers with 10 or more employees during the previous 12 months are obligated to pay gratuity. The law ensures employees are rewarded for loyalty and long-term service.

Eligibility Criteria

• Employee must have completed at least 5 years of continuous service (except in cases of death or disability).
• Organization should be covered under the Payment of Gratuity Act.
• Gratuity is payable upon retirement, resignation, death, or disablement due to accident/disease.

Formula to Calculate Gratuity

Gratuity = (Last Drawn Salary × 15 × Number of Completed Years) / 26

• Last Drawn Salary: Basic + Dearness Allowance
• 15: Days salary for each year of service
• 26: Average working days in a month

Examples of Calculation

If an employee has a last drawn salary of ₹50,000 and has worked for 12 years, then:

Gratuity = (50,000 × 15 × 12) / 26 = ₹3,46,154 (approx)

Round-Up Rules

• Service more than 6 months in a year counts as a full year.
• Service less than 6 months is ignored for calculation.

Tax Implications

• Gratuity received by government employees is fully exempt from tax.
• For private sector employees, it is exempt up to ₹20 lakh.
• Any amount exceeding ₹20 lakh is taxable under income tax laws.

Gratuity Calculator

Enter Last Drawn Monthly Salary (Basic + DA): Enter Total Years of Service:

Important FAQs

1. Can gratuity be denied?

Yes, if the employee is dismissed for misconduct, fraud, or moral turpitude, gratuity may be forfeited either partially or fully depending on the nature of the misconduct.

2. Is gratuity applicable for contractual employees?

If a contractual employee is on the payroll and meets the eligibility conditions, they are entitled to gratuity.

3. What happens if the employer delays payment?

If an employer fails to pay within 30 days, interest is payable on the delayed amount as per the Act.

Wage Code & Future of Gratuity

The new wage code proposes that basic salary must be at least 50% of total salary, which may increase the gratuity payout for employees, making it a more significant post-retirement benefit. The rules, once implemented, will bring uniformity and better transparency in wage structuring.

Tips for Employees

• Keep records of your appointment letter, salary slips, and service duration.
• File a formal request if gratuity is not paid within a month of leaving service.
• Use this calculator to plan your financial future and retirement corpus.

Final Thoughts

Gratuity is more than a statutory requirement; it is a reward for years of dedication. With changing employment landscapes and legal frameworks, understanding gratuity has become vital. This 2025 guide equips employees and HR professionals alike with actionable knowledge and practical tools to ensure smooth, lawful, and beneficial gratuity handling.