Suppose your last drawn monthly basic plus dearness allowance is Rs 60,000 and you have completed 10 years of continuous service. Under the Payment of Gratuity Act the formula is 15 divided by 26, multiplied by the last monthly basic plus DA, multiplied by the years of service. The 15-by-26 fraction treats gratuity as 15 days of pay for each completed year, counting a month as 26 working days. So the gratuity is 15 divided by 26, times Rs 60,000, times 10, which works out to about Rs 3,46,154. Because this is well under the Rs 20 lakh tax-free ceiling, the entire amount is exempt from income tax. Gratuity is generally payable only after 5 years of continuous service with the same employer, though death or disability waives that minimum.
Step
Value
Last monthly basic + DA
Rs 60,000
Years of service
10
Formula
(15 / 26) x 60,000 x 10
Gratuity payable
Rs 3,46,154
Taxable portion
Rs 0 (under Rs 20L limit)
How it is calculated
The tool applies the Payment of Gratuity Act formula for employees covered by the Act: 15 divided by 26, times the last drawn monthly basic plus dearness allowance, times the number of completed years of service. The 26 represents working days in a month and the 15 represents half a month of pay accrued per year. If service is under 5 years the tool returns zero, since gratuity is not normally payable before then, except in cases of death or disability. It then compares the result against the Rs 20 lakh lifetime tax-free limit: anything within the limit is exempt, and only the portion above Rs 20 lakh is taxable as salary. Some employers round part-years differently and a few use a 30-day month for staff outside the Act, so the figure here is the standard statutory estimate.
Frequently asked questions
Eligibility?
Generally 5+ years of continuous service with the same employer. Payable on resignation, retirement, or death (death waives the 5-year rule).
What is the tax-free limit on gratuity?
For employees covered under the Payment of Gratuity Act, the tax-free ceiling is Rs 20 lakh (updated in 2019). Gratuity received within this limit is fully exempt from income tax. Any amount above Rs 20 lakh is taxable as salary in the year of receipt.
How does the 15/26 formula work?
The formula treats a month as 26 working days and awards 15 days of pay for each completed year of service. Multiplying 15 divided by 26 by the last drawn monthly basic plus dearness allowance by years gives the statutory gratuity. Part years below 6 months are generally ignored; part years of 6 months or more are rounded up to a full year by many employers.
Is gratuity mandatory for all employers in India?
The Payment of Gratuity Act 1972 applies to every factory, mine, oilfield, plantation, port, railway company, and any shop or establishment with 10 or more employees. Once an establishment is covered it remains covered even if headcount later falls below 10. Smaller employers and certain categories of employees may fall outside the Act but some still pay gratuity voluntarily.