Gratuity: How It's Calculated and When You're Eligible

Eligibility

Under the Payment of Gratuity Act, 1972, an employee becomes eligible after completing 5 continuous years of service with the same employer (with limited exceptions like death or disability, where the 5-year requirement is waived).

The calculation formula

For employees covered under the Act: Gratuity = (Basic salary + Dearness Allowance) × 15 × number of years of service ÷ 26 - the "15/26" reflects 15 days' wages for every completed year, based on a 26-working-day month.

Tax treatment

Gratuity is tax-exempt up to ₹20 lakh (Section 10(10)) for employees covered under the Act - this is a lifetime cap across all employers, not a per-employer or per-payout limit. If you've already claimed exemption on gratuity from a previous employer, only the remaining headroom up to ₹20 lakh total is exempt on a later payout. Government employees face no such cap - their gratuity is fully exempt regardless of amount.

(Formula and the ₹20 lakh exemption cap checked as of September 2026 - the cap was last revised in March 2018 and hasn't changed since, though it's worth confirming if reading this much later.)

The takeaway

Gratuity is a genuine, calculable retirement benefit - not just a vague "thank you for your years of service" payment - worth factoring into your retirement corpus planning once you cross the 5-year eligibility mark with an employer.